'mi: 


V '  V 


LECTURES  ON  COMMERCE 


Lectures  on  Commerce 


DELIVERED  BEFORE  THE 

COLLEGE  OF  COMMERCE  AND  ADMINISTRATION 

OF  THE  UNIVERSITY  OF  CHICAGO 


Edited  by 

HENRY  RAND  HATFIELD 


THE  UNIVERSITY  OF  CHICAGO 

PUBLICATIONS  OF  THE  COLLEGE  OF  COMMERCE 

AND  ADMINISTRATION 

Vol.  I 


f     V    or  THc 


CHICAGO 

THE  UNIVERSITY  OF  CHICAGO  PRESS 

1904 


v^^ 


SPREGKELS 


r 


3^7 


Copyright  1904 
By  the  University  of  Chicago 


PREFACE 

Higher  commercial  education  has  evidently  gained 
a  place  in  American  universities  from  which  it  may 
never  be  displaced;  yet  he  would  indeed  be  a  daring 
champion  of  the  new  curriculum  who  showed  any  con- 
fidence in  prophesying  just  how  the  present  tendency 
will  finally  crystallize,  or  just  what  its  advantages  will 
prove  to  be.  But  one  unanticipated  service  has  already 
been  rendered.  However  much  the  caviler  may  object 
to  the  idea  that  the  university  can  fit  one  for  practical 
business  life,  he  should  nevertheless  admit  that  the 
movement  toward  commercial  education  has  at  least  the 
advantage  that  it  brings  the  university  man  into  closer 
contact  with  the  man  of  affairs.  If  it  cannot  train  for 
business,  the  university  can  at  least  be  itself  educated 
by  the  business  man,  who  brings  new  points  of  view, 
fresh  intellectual  vigor,  helpful  criticisms,  and,  at  times, 
stimulating  errors  —  all  of  which  serve  to  shake  the 
academician  in  his  loyalty  to  dogma,  or  at  least  to  lead 
him  to  examine  anew  its  title  to  sovereignty.  Surely 
economists  cannot  forget  the  debt  they  owe  to  Ricardo 
the  stockbroker,  to  Newmarch  the  banker,  to  Bagehot 
the  editor,  to  Brassey  the  contractor,  to  Montchretien 
the  manufacturer,  and  to  Gresham  the  merchant,  each 
of  whom  has  done  much  to  repay  to  the  science  of 
economics  the  debt  due  her  from  the  business  world  for 
services  in  explaining  the  conditions  of  material  pros- 
perity. And  so  today,  instead  of  forming  a  close  aca- 
demic clique,  the  universities  are  honored  by  the  men 


vi  PREFACE 

of  affairs  who  consent  to  burden  their  overcrowded 
hours  by  dehvering  addresses  to  the  students  in  the 
commercial  courses.  The  universities  cannot  but  profit 
by  this  innovation,  which  must  lead  to  more  catholic 
views,  to  less  intellectual  arrogance,  to  a  sounder  nexus 
between  theory  and  practice. 

The  University  of  Chicago  has  been  especially 
favored  in  this  respect.  Situated  in  so  great  a  com- 
mercial center,  it  has  been  able  to  invite  men  eminent 
in  their  callings.  The  response  which  has  been  received 
is  shown  by  this  volume  of  lectures,  and  the  College 
of  Commerce  and  Administration  again  expresses  its 
gratitude  to  those  who  have  so  generously  contributed 
their  time  to  the  common  work  of  commercial  educa- 
tion. Acknowledgment  is  also  due  to  the  Atlantic 
Monthly  for  permission  to  reprint  the  introductory 
lecture  by  Professor  Laughlin. 

It  is  regretted  that  the  conditions  of  publication 
made  it  impossible  to  reproduce  the  photographs  which 
were  used  by  Mr.  H.  F.  J.  Porter  to  illustrate  his  two 
lectures  on  forging.  This  has  in  turn  made  it  necessary 
for  the  author  to  abridge  the  text,  which  as  printed 
in  this  volume,  inadequately  represents  the  lectures  as 
delivered. 

Henry  Rand  Hatfield. 


CONTENTS 


INTRODUCTORY  LECTURE. 


Railways  as   Factors  in   Industrial  Develop- 
ment   -------- 

By  Luis  Jackson,  Industrial  Commissioner,  Chicago, 
Milwaukee  &  St.  Paul  Railway. 


PAGE 


Higher  Commercial  Education  -        -        -        -        3 
By  J.  Laurence  Laughlin,  Professor  and  Head  of 
the  Department  of  Political   Economy,  the  Univer- 
sity of  Chicago. 

RAILWAYS. 

Railway  AIanagement  and  Operation      -        -      29 
By  A.  W.  Sullivan,  Assistant  Second  Vice-Presi- 
dent, Illinois  Central  Railroad. 

R.\ilway  Mail  Service:    A  Historical  Sketch       57 
By  George  Gerard  Tunell,  Secretary  to  the  Presi- 
dent, Chicago  &  Northwestern  Railway  Co. 


81 


Some  Railway  Problems    -----     102 
By  Paul  Morton.  Second  Vice-President,  Atchison, 
Topeka  &  Santa  Fe  Railway  System. 

Railway  Consolidation      -        -        -        -        -iii 
By  E.  D.  Kenna,  Vice-President,  Atchison,  Topeka 
&  Santa  Fe  Railway  System. 

TRADE  AND  INDUSTRY. 

The  Steel  Industry  ------     131 

By  Franklin  H.  Head. 

v'i 


vffi  CONTENTS 


PAGE 


The  History  of  the  Art  of  Forging    -        -        -     145 
By   H.    F.   J.    Porter,    Bethlehem    Steel    Co.,    South 
Bethlehem,  Pa. 

'  The  Commercial  Value  of  Advertising      -        -     175 
By  John  Lee  Mahin,  President  of  the  ISIahin  Adver- 
tising Co. 

-  At  Wholesale     -------     203 

By  A.  C.  BartletTj  Vice-President,  Hibbard,  Spencer, 
Bartlett  &  Co. 

•The  Credit  Department  of  Modern   Business     218 
By  Dorr  A.  Kimball,  Credit  Man,  Marshall   Field 
&  Co. 

BANKING  AND  INSURANCE. 

The  Comptroller  of  the  Currency  -        -        -    233 
By  James  H.  Eckels,  President  of  the  Commercial 
National  Bank,  Chicago. 

The  Methods  of  Banking  -        -        -        -        -     243 
By  James  H.  Eckels,  President  of  the  Commercial 
National  Bank,  Chicago. 

Investments         -------     254 

By  D.  R.  FoRGAN,  Vice-President  of  the  First  Na- 
tional  Bank,   Chicago. 

Foreign  Exchange      ------    278 

By  H.  K.  Brooks,  Manager  of  the  Financial  Depart- 
ment, American  Express  Co. 

Fire  Insurance    -------     321 

By  A.  F.  Dean,  Assistant  Manager,  Western  Depart- 
ment,   Springfield    Fire   and    Marine    Insurance    Co. 


INDEX 381 


INTRODUCTORY  LECTURE 


HIGHER  COMMERCIAL  EDUCATION. 

J.  LAURENCE  LAUGHLIN,  PROFESSOR  AND  HEAD  OF 
THE  DEPARTMENT  OF  POLITICAL  ECONOMY,  THE 
UNIVERSITY  OF  CHICAGO. 

In  the  Philosophical  Transactions  cf  the  Royal 
Society  in  1798,  Sir  George  Shuckburgh-Evelyn,  in  a 
scientific  discussion  of  weights  and  standards,  ventured 
to  introduce  a  table  of  prices.  He  felt  obliged  to 
apologize  for  this  fall  to  a  lower  level,  by  saying: 
"However  I  may  appear  to  descend  below  the  dignity 
of  philosophy  in  such  commercial  researches,  I  trust 
I  shall  find  favor  with  the  historian,  at  least,  and  the 
antiquary."  This  is  but  a  hint  as  to  the  way  in  which 
the  study  of  the  practical  affairs  of  life,  even  down  to 
our  own  generation,  has  been  regarded  by  the  mana- 
gers of  the  old-fashioned  and  stereotyped  education; 
nor  can  it  be  said  that  we  have  fully  escaped  from  this 
attitude  of  mind  even  at  the  present  day. 

The  traditional  college  education  of  the  past  was 
intended  only  for  certain  of  the  learned  professions, 
particularly  the  ministry.  It  is  unnecessary  to  recall 
how  universally,  until  our  own  generation,  the  back- 
bone of  a  college  training  was  made  up  of  the  non- 
resilient  Latin,  Greek,  philosophy,  and  mathematics. 
These  subjects  remained  the  vertebrae  of  college  educa- 
tion during  the  whole  period  down  to  the  introduction 
of  the  elective  system.  When  liberty  of  choice  and 
an  extension  of  the  courses  of  study  were  introduced, 
they  were  regarded  somewhat  in  the  nature  of  a  veri- 
table  surgical   operation,   of   so   serious   a   kind  that 

3 


4  LECTURES  ON  COMMERCE 

the  doctors  wagged  their  heads  and  wondered  whether 
the  patient  would  survive.  Even  Mr.  Lowell,  after 
his  return  from  the  court  of  St.  James,  was  skeptical 
of  the  new  banquet  spread  for  unappreciative  guests. 
I  heard  him  telling,  jocosely,  in  an  after-dinner  speech 
in  Cambridge,  how  he  met  an  acquaintance  (of  dubious 
standing),  whose  cheerful  face  and  happy  demeanor 
led  him  to  ask  the  cause  of  such  exuberant  felicity. 
"Why,"  said  the  genial  smiler,  "I've  discovered  a  way 
to  make  my  fortune.  We  all  know  that  the  reason  for 
the  fine  flavor  of  the  wild  duck  is  the  wild  celery  on 
which  it  feeds.  Now  I  propose  to  feed  it  to  the  do- 
mestic duck,  and  supply  the  market."  Some  weeks 
later,  on  meeting  his  acquaintance  again,  Mr.  Lowell 
found  him  quite  depressed  and  inconsolable.  "Why 
are  you  looking  so  unhappy?  I  thought  the  last  time 
I  saw  you  that  you  were  on  the  point  of  making  your 
fortune  with  ducks.     Wouldn't  it  work?"     "No,"  was 

the  reply,  "the  d d  things  won't  eat  it." 

But  the  elective  system,  which  is  now  generally 
adopted  by  every  institution  having  means  to  supply 
the  expensive  menu,  was,  after  all,  but  the  beginning 
of  a  recognition  granted  to  what  one  might  call  the 
new  learning.  There  had  come  into  existence  a  grow- 
ing body  of  new  knowledge,  especially  in  the  fields  of 
science,  and,  in  addition,  new  problems  were  projecting 
themselves  on  the  economic  and  political  horizons. 
Lisensibly,  during  the  last  twenty-five  years,  one  new 
subject  after  another  has  crept  into  the  university  cur- 
riculum; and,  with  general  acquiescence,  each  has 
demonstrated  by  trial  its  right  to  live  as  an  accepted 
means  of  academic  discipline.     Indeed,  the  time  has 


HIGHER  COMMERCIAL  EDUCATION  5 

long  gone  by  when  anyone  would  be  inclined  to  ques- 
tion the  value  of  modern  science,  economics,  political 
science,  and  the  like,  as  effective  instruments  for  train- 
ing the  mind  and  creating  the  intellectual  grip  called 
for  in  efficient  public  service.  They  have  been  in  the 
past  placed  on  an  equal  footing  with  the  subjects  of 
the  old  curriculum,  and  have  proved  themselves  in  no 
respect  inferior.  Admittedly,  economics  would  not 
gi\'e  the  same  training,  for  example,  as  the  classics; 
but  it  slowly  dawned  on  the  academic  consciousness 
that  the  classics  alone,  even  when  added  to  philosophy 
and  mathematics,  were  not  a  complete  nor  the  only 
means  of  education.  There  are  many  sides  to  the 
mind,  there  are  many  persons  with  very  dift'erent  men- 
tal preferences  and  characteristics,  and  these  variations 
bid  for  various  studies  to  suit  their  several  needs. 
Candid  observers  felt  it  to  be  but  reasonable  to  admit 
that  the  old  learning  had  been  narrow  and  quite  too 
limited  to  fit  all  sorts  of  students. 

Naturally,  the  conservative  elements  intrenched  in 
our  institutions  of  learning  saw  through  a  glass  darkly, 
and  regarded  the  influx  of  the  Picts  and  Scots  of  com- 
mercial life  as  a  menace  to  culture;  it  was  felt  that  the 
new  learning  had  only  revenue  as  its  immediate  pur- 
pose, instead  of  culture;  that,  as  the  old  learning  had 
been  the  means  of  bringing  to  successful  fruition  the 
great  scholars  of  the  past,  to  give  up  the  old  scheme 
of  studies  was  to  give  up  the  accepted  standards  of 
scholarship.  The  other  side  contended  that,  as  no 
scholar  had  ever  had  any  but  the  old  form  of  training, 
it  was  illogical  to  argue  that  it  was  the  one  safe  system ; 
no  comparisons  could  be  made  with  any  other  process 


6  LECTURES  ON  COMMERCE 

of  development.  Moreover,  appeal  was  made  to  the 
fact  that,  if  the  aim  of  education  was  to  cultivate  intel- 
lectual grip  and  power,  the  subjects  of  the  new  learn- 
ing had  proved  to  be  as  good  instruments  of  education 
as  the  old.  In  struggles  with  difficulties  encountered 
in  the  new  studies,  the  student  could  be  taught — in 
fact,  is  being  taught — the  judicial  spirit,  the  love  of 
truth,  the  passion  for  learning,  accuracy,  and  a  sense 
of  form,  quite  as  effectively  in  the  pursuit  of  any  other 
studies.  It  was  practically  a  question  of  applying  the 
same  good  teaching  to  the  new  as  to  the  old  to  obtain 
much  the  same  admirable  results.  Hence,  if  the  old 
and  the  new  learning  stood  on  an  equal  basis  as  regards 
cultural  and  disciplinary  efficiency,  it  might  with  rea- 
son and  justice  be  claimed  that  the  new  learning  had 
in  addition  the  great  and  preponderant  advantage  for 
the  student  of  preparing  him  directly  for  the  real 
problems  in  the  practical  life  which  he  must  live  after 
leaving  the  university. 

Yet  the  natural  development  of  these  new  forces 
in  our  educational  system  has  been  impeded  by  a  state 
of  things  in  our  institutions  which  is  little  short  of 
startling.  The  discrepancy  between  the  amount  of 
force  exerted  and  the  limited  amount  of  achievement 
may  well  give  us  pause.  What  is  this  situation  which 
is  of  a  nature  so  surprising?  Why  is  the  outcome  so 
far  short  of  what  it  ought  to  be? 

By  way  of  taking  our  bearings,  let  us  try  to  get 
an  objective  view  of  our  general  educational  attitude 
and  of  the  direction  in  which  we  are  moving.  Much 
has  been  said,  and  justly  said,  of  the  splendid  advances 
made  in  graduate  study,   and   of  the  accompanying 


HIGHER  COMMERCIAL  EDUCATION  7 

higher  standards  of  scholarship,  which  have  been 
shown  within  the  last  few  decades  in  our  American 
universities.  But  what  of  this  movement  as  touching 
upon  the  relations  of  the  university  to  the  public,  espe- 
cially as  regards  the  professional  work  of  the  com- 
munity? Great  as  is  the  improvement  in  scholarship, 
great  as  are  the  new  foundations  and  endowments,  it 
would  be  false  to  the  facts  not  to  be  willing  to  admit 
that  this  enlarged  machinery  of  the  academic  depart- 
ments has,  in  its  relation  to  the  professions,  practically 
been  confined  to  the  preparation  of  men  and  women  for 
the  single  profession  of  teaching;  that  is,  much  the 
larger  part  of  the  enormous  foundations  of  the  exten- 
sive and  splendid  educational  plants  in  the  departments 
of  liberal  arts  in  this  country  are  mainly  given  over 
to  the  formation  of  an  advanced  normal  school  for 
teachers  in  schools  and  colleges.  Do  not  understand 
me  as  decrying  the  admirable  results  of  general  culture 
obtained  (by  such  as  find  it)  from  these  studies  that 
have  no  professional  object.  Not  all  bachelors  of  arts 
teach,  we  admit;  but  for  those  who  do  not,  and  who 
enter  a  business  life,  it  is  by  no  means  clear  that  the 
curriculum,  beyond  its  cultural  quality,  gives  them  the 
training  needed  for  their  future  careers.  As  a  pis  aller, 
any  new  graduate  of  moderate  scholarship  can  enter 
teaching  as  a  profession ;  but  how  many  would  have  an 
equal  efficiency  in  banking,  or  railway  management, 
or  trade  and  industry?  Perhaps  I  may  be  thought  to 
have  confused  non-professional  with  professional 
study;  that  I  am  really  concerned  with  the  work  of 
professional  schools.  But  the  advanced  work  of  the 
graduate  schools  in  the  general  field  of  literature,  arts. 


8  LECTURES  ON  COMMERCE 

and  science  has  become  without  question  practically 
a  training  course  for  professional  teachers;  and  the 
undergraduate  work  has  been  very  largely  influenced 
thereby.  Almost  never  does  a  man  go  on  to  the  de- 
gree of  master  of  arts  or  of  doctor  of  philosophy  who 
has  any  other  aim  than  teaching.  This  is,  undoubt- 
edly, the  situation  of  today.  Consequently,  the  obvious 
question  is  raised  whether,  apart  from  training  investi- 
gators, the  present  endowments  of  our  universities  are 
not  applied  out  of  all  proportion  to  one  traditional 
profession  to  the  neglect  of  others  as  much  or  more 
important  to  the  life  of  the  nation. 

Why  not  ask  ourselves  frankly  this  question :  Can- 
not even  the  undergraduate  work  of  the  university  be 
so  ordered  and  taught  that  the  youth  of  this  land  (who 
now  pass  from  the  high  school  to  the  counting-house) 
may  obtain  from  the  new  courses,  which  they  can  be 
persuaded  to  take  primarily  as  a  means  to  fit  themselves 
for  active  business  life,  the  same  general  cultural  gains 
as  have  been  secured  from  the  old  courses?  No  one 
believes  that  the  courses  in  law  and  medicine  (that  is, 
the  scientific  and  biological  subjects),  simply  because 
they  have  a  professional  aim,  have  no  cultural  effects. 
Indeed,  if  we  could  introduce  the  earnestness  of  the 
professional  student  into  the  undergraduate  work,  it 
would  be  a  signal  gain.  Moreover,  as  previously 
shown,  the  subjects  of  the  new  learning  have  proved  to 
be  equal  to  those  of  the  old  in  their  disciplinary  and 
cultural  efficiency.  Certainly  the  work  done  for  the 
arts  degree  ought  not  to  be  monopolized  for  one  special 
and  limited  constituency;  since,  without  derogation  of 
the  needs  and  value  of  that  constituency,  the  college 


HIGHER  COMMERCIAL  EDUCATION  9 

course  should  be  assumed  to  have  aims  touching  many 
more  constituencies. 

But  when  we  pass  from  the  college  curriculum  to 
that  of  the  professional  schools,  the  limitations  of  our 
educational  system  are  even  more  apparent.  Consider- 
ing the  actual  work  of  the  world,  the  means  of  prepara- 
tion for  it  are  sadly  out  of  joint.  It  will  be  found,  on 
a  little  reflection,  that  certain  professions  have  in  the 
past  obtained  recognition  and  munificent  endowments 
quite  as  a  matter  of  tradition  and  precedence,  and  not 
after  a  careful  weighing  of  their  importance  relatively 
to  other  constituencies.  The  country  now  has  well- 
supported  schools  for  the  training  of  men  in  war,  medi- 
cine, law,  and  technology;  but  it  is  quite  within  the 
truth  to  maintain  that  no  one  of  these  interests  has  as 
much  influence  upon  the  actual  work  and  welfare  of 
the  people  as  those  connected  with  railways  alone,  to 
,  say  nothing  of  the  wider  field  of  trade  and  industry. 
>  More  than  three-quarters  of  all  the  persons  engaged 
in  gainful  occupations  in  the  United  States  are  occu- 
pied in  agriculture,  fisheries,  mining,  manufacturing, 
mechanics,  trade,  and  transportation.  The  problems 
involved  in  the  management,  adjustment,  development, 
and  well-being  of  this  preponderant  mass  of  the  active 
population  of  this  country  present  altogether  the  great- 
est and  most  important  tasks  to  be  dealt  with  in  the 
new  century.  Leaders  and  the  public  must  be  given 
instruction  until  they  can  think  clearly  on  these  sub- 
jects of  everyday  concern. 

It  goes  without  saying  that,  as  the  world  moves  on, 
new  constituencies  and  new  demands  arise;  but  it  is 
not  the  less  our  duty  to  readjust  our  educational  forces 


lo  LECTURES  ON  COMMERCE 

to  the  new  needs.  Indeed,  the  relationship  of  the  uni- 
versity to  the  new  learning  is  at  once  the  most  obvious 
and  the  most  pressing  educational  question  of  the  day. 
On  general  grounds  it  is  self-evident  that  the  univer- 
sity must  be  regarded  as  a  trustee,  holding  its  vast 
educational  funds,  not  for  one  part,  but  for  the  whole, 
of  the  great  public.  This  ceases  to  be  a  glittering  gener- 
ality, and  assumes  a  new  phase,  when  we  recall  that 
the  greater  institutions  of  the  country  have  in  nearly 
every  case  obtained  their  munificent  foundations  from 
those  who  have  been  successful  in  the  walks  of  trade 
and  industry;  and  yet,  strange  to  say,  these  very  insti- 
tutions have  in  the  past  done  little  or  nothing  to 
prepare  men  for  the  very  occupations  from  which  they 
have  obtained  the  actual  means  of  existence.  It  is 
startling  to  think  how  little  influence  the  universities 
of  today  have  had  in  training  the  great  men  in  the  con- 
stituencies of  banking,  railways,  insurance,  trade  and 
industry,  diplomacy,  journalism,  and  politics. 

The  nature  of  the  new  education  which  this  wide- 
awake century  demands  of  us  might  be  illustrated, 
without  going  too  much  into  detail,  by  referring  again 
to  only  one  of  the  constituencies  above  mentioned.  It 
should  be  possible  to  distinguish  between  that  which  is 
purely  technical  and  that  which  is  mainly  managerial. 
While  a  school  of  mechanical  engineering  is  required 
to  fit  a  man  for  the  practical  parts  of  railroading,  there 
exists  in  that  profession  a  far  more  important  career 
for  the  man  who  is  competent  to  direct  the  traffic, 
classify  goods,  fix  rates,  watch  the  coming  financial 
depression,  know  the  signs  of  coming  prosperity,  have 
insight  into  as  well  as  experience  with  the  questions 


HIGHER  COMMERCIAL  EDUCATION  ii 

of  labor  and  the  relations  of  employers  to  employees, 
understand  the  duties  as  well  as  the  privileges  of  cor- 
porations, and  who  has  the  masterly  mind  to  devise 
and  carry  out  great  financial  operations  involved  in  the 
management  of  securities  on  a  scale  hitherto  unprece- 
dented. "  Jt  may  be  said  that  such  men  are  made,  not 
educated;  but,  similarly,  we  admit  that  even  a  born 
lawyer  must  study  the  principles  and  precepts  of  juris- 
prudence in  order  to  do  his  work.  The  duties  of  a 
railway  manager  could  not  be  met  by  a  man  of  purely 
technical  or  engineering  training;  he  must  be  schooled 
mainly  in  the  courses  of  legal,  political,  and  economic 
science.  In  these  departments  there  is  as  distinct  a 
body  of  disciplinary  material  for  the  railway  manager 
as  there  is  in  the  courses  of  the  law  school  for  the 
lawyer.  And  just  as  in  the  best  law  schools  the  pri- 
mary object  is,  not  to  give  technical  skill  in  drawing 
up  papers  or  to  furnish  the  detailed  pleadings  of  the 
courts,  but  to  train  men  to  think,  to  apply  precedents 
to  particular  cases — in  short,  to  get  legal  grasp  and 
power — so  also,  in  the  preparation  for  these  practical 
professions,  emphasis  is  to  be  put,  not  upon  the  tech- 
nical details  of  subordinate  and  auxiliary  processes, 
but  upon  the  capacity  to  bring  a  seasoned  and  practical 
intellect  to  the  management  and  conduct  of  great  prac- 
tical problems. 

■  To  take  another  illustration,  a  preparation  for 
banking  should  not  be  a  drill  in  technical  bookkeeping, 
or  teaching  a  messenger  how  to  carry  a  bag  of  gold  in 
safety  from  one  institution  to  another.  The  essential 
purpose  of  education  leading  up  to  such  a  profession 
would  be  a  training  in  the  principles  affecting  the  prob- 


12  LECTURES  ON  COMMERCE 

lems  which  necessarily  arise  in  local,  national,  and 
international  banking.  There  are  principles  of  money 
and  credit  underlying  these  phenomena  often  not 
understood  even  by  many  bank  officials.  The  man 
who  has  been  taught  how  to  approach  such  problems, 
to  work  out  solutions,  to  apply  power  and  grasp  of 
large  and  important  subjects,  must,  in  the  end,  prove 
an  infinitely  better  head  of  a  bank  than  he  who  has 
come  slowly  forward  from  the  window  of  an  account- 
ant or  teller,  and  whose  professional  education  has 
consisted  of  the  chance  events  brought  to  his  attention 
in  the  round  of  daily  business.  Men  of  this  latter 
description  wall  become  accurate,  steady,  and  useful  to 
the  institution  in  minor  positions;  but  if  promoted  to 
high  posts  they  will  be  found  to  know  really  nothing 
beyond  the  dry  husks  of  their  professional  experience 
or  a  personal  acquaintance  with  their  constituency. 
The  recruiting  of  high  officials  in  this  fashion  accounts 
for  the  prevalence  of  so  much  lagging  conservatism 
and  ignorant  timidity  in  regard  to  burning  monetary 
questions  of  the  day. 

If  these  great  divisions  of  our  practical  life  have 
been  slightly  regarded  by  the  universities,  it  must  be 
charged  up  to  the  account  of  inertia  and  a  failure  to 
keep  in  touch  with  the  intellectual  demands  of  a  chan- 
o-ing-  world.  Such  a  situation,  once  it  has  been  called 
to  the  attention  of  a  people  who  pride  themselves  on 
being  shrewd  and  enterprising,  must  certainly  appear 
amazing.  But  has  this  situation  anything  to  do  with 
our  other  question?  Why  has  there  not  been  more 
product  from  our  educational  tilling? 

Doubtless  many  instructors  in  all  the  higher  insti- 


HIGHER  COMMERCIAL  EDUCATION  13 

tutions  of  learning-  would  be  able  to  bear  regretful  testi- 
mony to  a  falling  off  in  the  high  level  of  ability  of 
those  students  who  present  themselves  for  graduate 
work.  The  explanation  is  not  far  to  seek.  If  the  fact 
be  granted,  the  rut  in  which  our  university  education 
has  been  traveling  goes  far  to  explain  it.  To  the  virile 
and  enterprising  spirits  who  are  tempted  by  the  great 
rewards  of  banking,  railways,  insurance,  trade  and 
industry,  the  universities  have — at  least  not  until  very 
recently — offered  no  inducements.  If  their  purpose, 
apart  from  general  culture,  be  not  to  enter  law,  divin- 
ity, or  medicine,  where  can  they  go  for  training  except 
to  schools  of  technology?  And  yet  the  engineering, 
chemical,  mining,  electrical,  and  similar  courses  are 
solely  and  properly  technical.  They  cannot  attempt  to 
provide  the  managerial  education  demanded;  nor  has 
it  been  provided  as  yet.  Therefore  the  result  was  to 
have  been  expected.  If  the  college  and  graduate  de- 
partments have  used  their  advanced  courses  mainly  to 
create  professional  teachers;  if  the  endowed  profes- 
sional schools  are  only  for  clergymen,  lawyers,  doctors, 
or  technologists — it  follows  as  a  matter  of  course  that 
the  powerful  and  ambitious  youth  of  the  land,  who  are 
drawn  to  the  exploitation  of  our  new  resources,  have 
little  inducement  to  come  to  the  universities.  It  is  a 
matter  of  common  remark  that  never  before  in  our  his- 
tory have  the  undeveloped  resources  of  the  United 
States  bidden  higher  for  power,  skill,  and  intelligence 
than  now.  Never  in  our  history  have  the  industries 
of  our  country  yielded  more  enormous  returns  from 
the  introduction  of  new  methods,  better  organization, 
and  high  executive  ability  than  now.    To  the  men  who 


14  LECTURES  ON  COMMERCE 

can  officer  these  enterprises  large  material  rewards  are 
offered,  and  they  are  not  likely  to  be  less  tempting  in 
the  future. 

If,  then,  apart  from  affording  general  means  of  cul- 
ture, the  college  and  graduate  work  continue  to  be 
confined  largely  to  preparing  advanced  teachers,  it  is 
evident  that  our  universities  will  become  more  and 
more  detached  from  the  real  world  around  them. 
Teaching,^  and  even  the  so-called  learned  professions, 
do  not  begin  to  hold  out  the  inducements  to  capable 
young  men  which  are  offered  by  the  new  fields  of  active 
life.  That  this  class  of  persons  do  not  come  up  to  the 
university  for  college  work,  because  that  work  per  se 
will  not  train  them  for  their  future  careers,  is  a  trite 
statement.  But  why  should  not  the  colleges  and  the 
graduate  school  offer  them  courses  as  useful  to  their 
purposes  as  are  now  offered  to  the  professional  teacher  ? 
This  is  the  true  way  to  bridge  the  chasm  between  gown 
and  desk.  It  is  to  be  hoped  that  in  the  end  this  process 
will  help  to  remove  from  the  minds  of  business  men 
the  old  distrust  of  academic  training,  as  well  as  from 
the  minds  of  the  academic  class  the  condescending  atti- 
tude toward  men  of  affairs. 

Provided  it  be  convinced  of  its  shortcomings,  can 
the  penitent  university  turn  over  a  new  leaf?  Can  it 
undertake  to  furnish  the  practical  means  of  training 
men  for  the  neglected  professions?  There  is  no  ques- 
tion that  it  is  worth  doing;  but  is  it  practicable?     Or 

*  Professor  Munsterberg,  in  his  remarkable  article  on  "Pro- 
ductive Scholarship  in  America,"  in  the  Atlantic  for  May,  1901,  has 
already  shown  why  better  men  are  not  drawn  toward  teaching  in  the 
United  States  ;  but  he  has  not  gone  into  the  reasons  why  the  Ameri- 
can universities  do  not  attract  the  ablest  youth  as  students. 


HIGHER  COMMERCIAL  EDUCATION  15 

should  we  fall  back  on  the  assumption  that  a  course  of 
so-called  "cultural,"  non-commercial  work  is  all  in  all 
the  best  foundation  for  active  business  life? 

As  to  its  practicability  no  new  demonstrations  are 
necessary.  To  the  leaders  of  university  policy — sup- 
posedly educational  experts — is  given  the  duty  of  de- 
ciding in  detail  upon  the  subjects,  the  methods  of  in- 
struction, and  the  fitness  of  instructors.  The  task  is 
partly  a  new  one ;  but  it  is  certainly  no  more  difficult  of 
execution  than  that  which  has  already  been  met  in 
working  out  the  most  efficient  training  for  law  or  medi- 
cine. Many  of  the  needed  subjects  have  already  found 
a  place  in  the  university  class-room.  Time  and  ex- 
perience will  bring  changes  and  improvements  in  any 
original  scheme  of  study. 

Doubtless  there  is,  or  may  be,  a  suspicion  attached 
to  the  curricula  of  such  a  system,  on  the  ground  that 
"commercial"  studies  will  lower  the  standard  of  schol- 
arship and  bring  in  an  era  of  courses  "for  revenue 
only;"  or  that  the  classical  and  scholarly  activities  of 
the  university  will  be  submerged  by  an  avalanche  of 
students  having  only  a  material  point  of  view.  All 
these  objections  are  more  imaginary  than  real.  As  has 
been  mentioned  before,  such  subjects  of  the  new  learn- 
ing as  economic  and  political  science  have  been  for  a 
quarter  of  a  century  gladly  welcomed  alongside  the 
traditional  classics,  philosophy  and  mathematics;  nor 
in  all  these  years  has  it  ever  been  suggested  that  these 
new  subjects  were  not  equally  effective  with  those  of 
the  old  learning  in  giving  discipline  and  mental  grip. 
They  have  established  their  right  to  live,  not  merely 
because  they  bear  on  the  problems  of  the  neglected  pro- 


i6  LECTURES  ON  COMMERCE 

fessions  above  mentioned,  but  because  they  are  ad- 
mirable instruments  of  culture;  because  they  force  men 
to  think  on  the  subjects  with  which  they  must  deal  in 
their  professions;  because(under  good  instructors) they 
cultivate  accuracy  of  statement,  precision,  logic,  the 
judicial  spirit,  the  love  of  truth,  and  a  sense  of  form. 
What  more  can  be  said  of  any  other  part  of  the  ac- 
cepted university  work?  Certainly  these  new  courses 
will  not  have  changed  their  disciplinary  quality  because 
they  may  be  grouped  and  arranged  as  parts  of  an 
orderly  system  leading  up  to  the  industrial  professions 
of  our  country. 

Nor  is  there  any  ground,  in  my  judgment,  for  sup- 
posing that  the  university  would  be  submerged  by  a 
sw^arm  of  men  having,  not  cultural,  but  commercial, 
aims.  If  the  class  who  do  not  now  come  up  to  the 
university  should  be  offered  the  advantages  of  the  new 
education,  of  course  the  cultural  gains  for  them  must 
come  out  of  the  work  which  they  must  take  primarily 
as  a  preparation  for  business.  This  new  constituency 
will  come  to  the  university — if  it  comes  at  all — only 
because  they  can  there  get  a  genuine  advantage  over 
the  untrained  throughout  their  subsequent  careers  in 
trade  and  industry.  Here  in  itself  is  a  principle  of 
selection  which  will  act  as  a  safeguard.  Furthermore, 
if  there  is  a  present  tendency  for  the  most  powerful  ele- 
ments of  the  community  to  go  into  business,  then  it 
stands  to  reason  that,  if  such  men  are  induced  to  come 
to  the  university  for  their  training,  the  university  will 
be  the  gainer  rather  than  the  loser.  Anyone  who  has 
ever  been  in  business  knows  that  the  mental  force  and 
power  shown  by  men  in  that  walk  of  life  is  in  general 


HIGHER  COMMERCIAL  EDUCATION  17 

superior  to  that  in  academic  life.  In  all  justice,  this 
class  has  as  much — if  not  more — right  to  be  considered 
as  that  engaged  in  teaching  or  any  similar  profession. 
This  is  the  body  of  persons  who  would  introduce  new 
and  vitalizing  blood  into  the  student  community,  much 
to  the  advantage  of  all.  If  there  is  any  health  in  the 
old  studies,  they  will  hold  their  own  in  contact  with 
the  new;  if  the  new  constituencies  are  mainly  recruited 
from  origins  characterized  by  force,  while  the  old  come 
from  those  of  culture,  students  who  come  primarily 
for  professional  gains  will  carry  away  cultural  results 
as  well.  The  university  will  draw  to  itself  new  con- 
stituencies without  losing  the  old  ones ;  it  will  fit  for  all 
instead  of  for  a  few  professions;  it  will  bring  force  to 
the  cultural  elements  and  culture  to  the  forceful  ele- 
ments. In  a  true  sense,  then,  will  an  institution  become 
a  university,  not  merely  because  it  teaches  many  things, 
but  because  it  successfully  fits  its  students  to  solve 
their  respective  problems  in  all  parts  of  the  life  which 
they  must  live  after  leaving  the  university. 

It  may  not  be  amiss  at  this  point  to  give  some  typical 
courses  of  study  already  adopted  in  some  of  our  uni- 
versities.2  Once  admitted  to  the  School  of  Commerce 
of  the  University  of  Wisconsin,  the  student  is  required 
to  study,  together  with  some  general  elementary 
courses,  the  Industrial  History  of  England,  History  of 
Commerce,  Business  Forms  and  Accounts,  Transpor- 

^  In  addition  to  the  three  institutions  here  mentioned,  courses 
similar  to  those  above  described  have  been  introduced  at  the  univer- 
sities of  Michigan  and  California.  At  Harvard  "courses  for  busi- 
ness" are  offered.  In  Germany,  the  University  of  Leipzig  has  gone 
in  the  same  direction,  although  the  more  technical  courses  are  given 
in  the  Handelslehranstalt. 


i8  LECTURES  ON  COMMERCE 

tation,  Banking  and  the  Mechanism  of  Exchange, 
Business  Organization  and  Management,  Commercial 
Law,  Economics,  German,  French,  Spanish,  and  Eng- 
lish, and  the  Generation  and  Transmission  of  Force. 
Then  he  may  choose  between  the  two  fields  of  Banking 
and  the  Consular  Service.  For  the  former,  he  elects 
Money  and  Banking,  History  of  Currencies  in  Modern 
Nations,  Corporation  Finance  and  Securities,  and 
Crises ;  for  the  latter,  he  elects  International  Law,  Com- 
mercial Geography  of  Europe,  Diplomacy,  the  Con- 
sular Service  of  the  United  States  and  Foreign  Coun- 
tries. At  the  end  of  the  course  the  degree  of  Bachelor 
of  Commercial  Science  is  given. 

Passing  the  two-years'  course  in  Business  Practice 
and  Banking,  at  the  University  of  Pennsylvania,  to  the 
four-years'  course  in  Commerce  and  Industry,  it  ap- 
pears to  be  a  scheme  of  work  having  a  general  object, 
rather  than  a  separation  into  groups  leading  to  special 
professions.  The  required  subjects  of  the  first  two 
years  include :  English,  French,  German,  Accounting, 
Economic  Geography,  Constitutional  Law,  Practical 
Finance,  Business  Law,  Political  Economy,  Geography 
of  Commerce,  and  Legislative  Procedure.  In  the  last 
two  years  twelve  of  the  necessary  sixteen  hours  a 
week  may  be  elected  from  the  following:  Economics, 
American  Commerce,  Banking,  Commercial  Treaties, 
Corporation  Law,  Commercial  Products,  Industrial 
History,  Economic  Resources  of  Europe  and  the 
United  States,  Recent  Changes  in  Industry,  Legislative 
Problems,  Finance,  European  Commerce,  Colonial 
Government,  Economic  Resources  of  Tropical  Coun- 
tries, Causes  of  Industrial  Supremacy,  English  Civi- 


HIGHER  COMMERCIAL  EDUCATION  19 

lization,  International  Law,  Race  Traits,  International 
Trade,  Transportation,  and  Credits.  The  degree  of 
Bachelor  of  Science  in  Economics  is  given. 

At  the  University  of  Chicago  the  entrance  require- 
ments to  the  regular  college  work,  including  Latin,  are 
demanded  of  the  candidates  for  the  College  of  Com- 
merce and  Administration.     The  work  of  the  first  two 
years  is  mainly  that  pursued  in  the  general  work  of 
the    college,    including    English,    modern    languages, 
mathematics,  and  science,  with  introductory  courses 
in  Civil  Government,  History,  Sociology,  Economics, 
and  Commercial  Geography.    In  the  last  two  years  the 
direct  preparation  for  business  begins,  based  on  the 
general  training  of  the  past  years  in  college  and  in  the 
schools.     Of  the  necessary  eighteen  units  exacted  in 
these  last  two  years,  seven  are  required  and  eleven  are 
elective.  The  requirements  include  Principles  of  Politi- 
cal Economy,  Jurisprudence,  Constitutional  Law,  Eu- 
rope in  the  Nineteenth  Century,  Recent  American  His- 
tory, Psychology.     The  remaining  eleven  are  chosen, 
under  advice,  as  leading  directly  to  Banking,  Railways, 
General  Industries,  Foreign  Commerce,  Consular  Serv- 
ice, and  Journalism ;  and  they  are  taken  from  the  fol- 
lowing list:     (a)   Theor}'  of  Value,  Unsettled  Prob- 
lems of  Distribution,  Historv^  of  Political  Economy, 
Scope  and  Method  of  Political  Economy,   Statistics, 
Economic  Factors  in  Civilization,  American  Agricul- 
ture, Tariffs,  Industrial  Development  of  Europe,  Mod- 
ern Industries,  Economics  of  Workingmen,  Socialism, 
Technique  of   Trade   and   Commerce,    Colonial    Eco- 
nomics, History  of  Commerce,  Trusts,  Transportation, 
Comparative  Railway  Legislation,  Accounting,  iMoney, 


20  LECTURES  ON  COMMERCE 

Banking,  Financial  History  of  the  United  States,  and 
Finance;  (b)  History  of  Political  Theory,  Compara- 
tive Government,  Federal  Government,  Government  of 
Great  Britain,  France,  and  Germany,  Government  of 
Colonies,  Federal  and  State  Constitutional  Law  of 
the  United  States,  Law  of  Municipal  Corporations, 
Municipal  Government,  International  Law,  Diplomatic 
History  of  Europe  and  the  United  States,  Roman 
Law,  Law  of  Property,  and  Law  of  Persons;  (c) 
American  History  (1789-1860),  American  Political 
Parties,  the  Renaissance,  Europe  in  the  Seventeenth 
and  Eighteenth  Centuries,  the  French  Revolution  and 
Era  of  Napoleon,  and  the  Rise  of  Prussia;  (d)  Con- 
temporary Society  in  the  United  States,  American 
Cities,  Development  and  Organization  of  the  Press, 
the  Family,  Rural  Communities,  Contemporary  Chari- 
ties, Social  Treatment  of  Crime,  Structure  of  English 
Society,  Philanthropy,  Elements  and  Structure  of 
Society,  Municipal  Sociology,  the  Sociological  Concep- 
tion of  the  State,  and  of  the  Problems  of  Modern 
Democracy;  and  (e)  eleven  courses  of  science,  includ- 
ing Electricity,  Physiography,  Economic  Geology, 
Mineralogy,  Chemistry  of  Ore  Deposits,  Geographic 
Botany,  etc.  The  degree  of  Bachelor  of  Philosophy  is 
given. 

The  criticism  raised  in  academic  circles  by  the  word, 
"commercial"  seems  to  imply  a  suspicion  of  unworthi- 
ness  in  the  work  of  a  school  which  is  intended  to  pre- 
pare men  for  business.  That  all  depends  upon  the 
kind  and  purposes  of  the  new  education.  The  essential 
aim  of  a  college  of  commerce  and  administration 
should  be,   not  technical,   but   disciplinary;   it  is  not 


HIGHER  COMMERCIAL  EDUCATION  21 

intended,  according  to  an  obsolete  theory  of  education, 
only  to  give  useful  information,  but  to  give  the  knowl- 
edge of  underlying  principles  and  that  mental  grip 
which  will  provide  the  possessor  with  the  capacity  to 
meet  comprehendingly  a  new  problem,  however  sud- 
denly it  may  arise;  its  function  is  not  merely  to  impart 
technique,  or  a  rule  of  thumb,  which  may  at  any  time 
become  obsolete,  but  to  teach  men  to  think  in  the 
affairs  of  their  profession. 

This  educational  attitude  may  be  illustrated  by  refer- 
ence to  the  profession  of  journalism.  ^luch  well- 
deserved  sarcasm  has  been  directed  against  the  plan 
of  establishing  schools  of  practical  journalism.  If  the 
plan  meant  solely  teaching  a  student  how  to  condense 
paragraphs,  how  to  expand  a  sentence  into  a  lurid  col- 
umn of  description,  how  to  interview  an  obdurate 
public  character,  or  how  to  paint  the  page  with  the 
most  striking  headlines,  then  there  is  no  better  means 
of  teaching  journalists  than  the  actual  routine  of  the 
newspaper  office.  But  this  method  is  a  receipt  only  for 
making  hacks,  not  journalists.  On  the  other  hand, 
what  is  the  right  way?  It  is  seen  at  once  that  the 
policy  and  influence  of  a  newspaper  depend  upon 
whether  or  not  it  shows  a  masterly  grasp  of  the  politi- 
cal, economic,  legal,  and  literary  subjects  which  the 
public  are  thinking  about.  How  can  a  man  be  pre- 
pared to  deal  adequately  and  powerfully  with  these 
matters?  Certainly  not  by  mistaking  the  shadow  for 
the  substance;  not  by  caring  for  the  envelope  at  the 
expense  of  the  content.  Good  English  form  is  essen- 
tial— we  assume  that;  but  to  be  a  journalist,  and  not  a 
hack,  a  man  must  be  trained  to  think  logically  and 


22  LECTURES  ON  COMMERCE 

clearly  on  all  the  subjects  treated  by  the  press.     Other- 
wise he  is  as  much  out  of  place  in  an  important  position 
on  a  newspaper  as  a  paralytic  in  an  athletic  contest. 
The  purpose  of  commercial  education  will  not  be 

/met  simply  by  knowing  much  about  commerce;  its 
success  can  be  obtained  only  by  realizing  that  piled-up 
knowledge  is  an  unsteady  monument  unless  braced  and 
held  true  by  an  informing  body  of  logical  principles 
which  have  been  understood  and  used  by  the  builder. 
The  distinction  is  an  important  one.  Permit  me  to 
illustrate  it.  There  may  be  two  ways  of  teaching  a 
mechanic  how  to  build  a  steam  engine:  In  one  way, 
he  might  be  given  the  measurements  and  plans  for  a 
specified  engine,  and  by  memory  and  imitation  this  one 
body  of  facts  might  be  imprinted  on  his  mind.  The 
workman  could  build  this  engine,  but  no  other  kind. 
In  another  way,  one  might  teach  him  thoroughly  the 
laws  of  thermodynamics,  the  strength  of  materials, 
the  principles  of  applying  forces,  etc. ;  and  the  work- 
man, understanding  the  theory  of  the  particular  engine 
when  expressed  in  one  form  for  a  given  purpose, 
could  readily  adapt  the  same  principles  to  another  ad- 
justment of  materials,  and  make  a  different  engine  for 
a  different  purpose.  The  former  system  is  the  repeti- 
tion of  parrot-teaching;  the  latter  is  education. 
^^li,  then,  one  finds  a  system  of  commercial  education 
which  leaves  out  the  fundamental  requirements  of 
training  common  to  all  proper  schemes  of  developing 
the  human  mind;  if  it  proposes  to  throw  away  the 
training  instruments  of  admitted  quality,  and  to  carry 
commercial  courses  of  a  merely  informational  char- 
acter down  into  the  high  school — then  we  have  reason 
for  criticism. 


HIGHER  COMMERCIAL  EDUCATION  23 

Commercial  high  schools  carry  the  professional 
purpose  down  into  the  period  usually  given  to  the 
general  disciplinary  work  of  the  secondary  schools. 
So  far  as  the  courses  for  such  schools  are  informa- 
tional, and  not  disciplinary,  they  defeat  the  true  aims 
of  education.  If  the  man  of  affairs  should  never  get 
literary  and  cultural  training  even  in  the  high  schools, 
he  would  be  worse  off  than  he  is  now;  and  there  would 
tend  to  arise  more  and  more  a  class  of  narrow  business 
men  who  would  have  little  or  no  understanding  of  any 
other  life  than  the  pursuit  of  wealth.  The  establish- 
ment of  such  high  schools,  therefore,  seems  to  be  a 
response  to  the  commercial  ideals  of  the  age — a  means 
for  the  better  technical  equipment  of  our  youth  at  the 
expense  of  that  general  knowledge  which  should  be 
regarded  as  the  necessary  foundation  for  subsequent 
professional  work.  Money-getting  should  be  accepted 
as  a  means  to  an  end,  not  the  end  itself;  training  for 
money-getting  should  be  thought  of  as  secondary  to 
the  creation  of  superior  tastes,  qualities,  and  intelli- 
gence by  which  the  higher  things  of  life — things  not 
to  be  bought  by  money — could  be  discovered  and  en- 
joyed. 

In  Germany,  the  overproduction  of  scholars  has 
revealed  the  same  existing  tendencies  as  in  our  univer- 
sities to  emphasize  the  function  of  the  university  as  a 
training  school  for  teachers,  even  though  many  pass 
into  the  public  service  as  well  as  into  the  learned  pro- 
fessions. Means  for  the  preparation  of  men  for  what 
I  have  called  the  neglected  professions  has  not  been 
provided  by  the  universities  (with  the  recent  exception 
of  Leipzig),  but  only  by  the  technical  schools.     When 


24  LECTURES  ON  COMMERCE 

the  educated  German  gets  over  his  dread  of  the  de- 
humanizing effects  of  subjects  which  are  praktische, 
and  his  tendency  to  exalt  that  which  has  no  commercial 
end  (wholly  apart  from  his  splendid  reverence  for 
scholarship  and  research  which  has  given  imperishable 
renown  to  German  learning,  and  which  nothing  should 
touch),  we  may  expect  to  see  the  German  university 
accepting  the  duty  of  preparing  men  for  all  the  profes- 
sions instead  of  for  a  few — and  this  without  deroga- 
tion of  the  highest  standards  of  academic  achieve- 
ment. 

When  Bismarck  attributed  the  success  of  his  sol- 
diers in  the  Franco-Prussian  war  to  the  fact  that  "each 
musket  thought,"  he  was  merely  expressing  in  one 
form  the  general  principle  which  holds  in  the  more 
peaceful  contests  of  domestic  and  international  com- 
petition of  industry  with  industry.  If  we  are  ever  to 
succeed  in  taking  a  commanding  position  in  inter- 
national commerce,  it  will  be  because  our  industrial 
and  commercial  education  is  based  on  the  correct  prin- 
ciple of  educating  men  to  think,  and  to  work  out  and 
understand  the  principles  which  underlie  all  the  active 
work  of  their  professions.  The  ability  to  undersell 
foreigners  in  the  international  market  is  not  a  question 
of  the  bravery  of  our  soldiers  and  sailors;  it  is  not  a 
question  of  the  size  of  our  army  or  the  number  of  our 
battleships;  it  is  not  a  question  of  physical  force  or 
blind  Chauvinism;  but  it  is  a  question  whether  the 
practical  managers  of  our  mills  and  workshops  are 
capable  of  devising  better  methods  than  foreigners 
for  hoisting  our  raw  materials  in  a  less  expensive  way 
from  the  mines;  for  transporting  them  with  greater 


HIGHER  COMMERCIAL  EDUCATION  25 

dispatch  and  cheapness;  and  for  transforming  them 
into  finished  products  with  better  machinery,  with 
greater  adaptabiHty,  and  with  greater  skill  than  our 
competitors.  Stereotyped  methods  will  not  avail;  it 
will  not  do  to  tell  a  man  how  to  perform  a  task  today 
without  at  the  same  time  teaching  him,  by  a  training 
in  fundamental  principles,  how  to  think  out  a  new  and 
better  method  if  a  new  adjustment  shall  be  needed  to- 
morrow. No  rule  of  thumb  can  do  the  work.  The 
object  of  education  is  to  develop  power  and  grip,  not 
to  give  dogmatic  precepts.  The  best  training  for  prac- 
tical life,  therefore,  is  not  to  be  found  in  that  which 
is  technical,  but  in  that  which  is  disciplinary.  In  indus- 
try, as  in  manners,  we  Americans  have  lived  too  much 
under  the  reign  of  "slouch;"  in  the  future,  under  the 
stern  demands  of  large  industrial  movements,  the 
exact,  the  powerful,  well-trained,  and  far-seeing  man 
will  inevitably  displace  the  man  of  routine,  narrow- 
ness, and  mediocrity. 


RAILWAYS 


RAILWAY  MANAGEMENT  AND  OPERATION. 

A.    W.    SULLIVAN,    ASSISTANT    SECOND    VICE-PRESIDENT, 
ILLINOIS  CENTRAL  RAILROAD. 

The  purpose  of  a  railroad  may  briefly  be  stated  to 
be  the  safe  and  expeditious  transportation  or  convey- 
ance of  persons  and  things  from  one  place  to  another, 
all  other  considerations  being  subordinate  or  incidental 
to  that  purpose.  To  produce  this  result  in  a  definite, 
systematic,  reliable,  and  economical  manner  is  the  ob- 
ject of  railway  organization  and  the  aim  of  the  service. 
Notwithstanding  the  apparent  simplicity  of  the  pur- 
pose, the  means  required  for  its  development  are  pon- 
derous to  a  degree  beyond  that  of  any  other  industry, 
and  the  methods  of  administration  are  of  a  most  com- 
plex order. 

The  ownership  of  a  railroad  is  vested  in  the  share- 
holders, who  control  the  property  through  a  Board  of 
Directors,  which  they  elect  for  the  purposes  of  adminis- 
tration. The  Board  of  Directors  in  turn  elects  the 
President,  who  as  chief  executive  officer  guides  the 
administration  and  exercises  all  the  powers  of  control 
and  direction.  To  assist  him  in  this  responsible  task, 
heads  of  departments  are  appointed,  who  have  control 
of  the  active  management.  From  this  point  the  organ- 
ization differentiates  rapidly,  the  duties  of  the  officers 
of  the  various  ranks  becoming  less  general  in  their 
scope  and  the  extent  of  their  territory  correspondingly 
diminished,  until  finally  their  locations  are  fixed  and 
their  duties  confined  specifically  to  details,  the  capable 

Z9 


30  LECTURES  ON  COMMERCE 

handling  of  which  contributes  so  greatly  to  the  success 
and  efficiency  of  the  management. 

The  principal  departments  of  railway  service  are 
usually  classed  as  follows :  Law  Department,  Treas- 
ury Department,  Traffic  Department,  Operating  De- 
partment. The  President  as  chief  executive  officer  has 
authority  in  all  departments.  Upon  large  systems  of 
railway  the  head  of  each  of  the  principal  departments 
named  is  usually  a  Vice-President,  with  jurisdiction 
limited  to  his  own  department.  Each  Vice-President 
is  assisted  by  a  corps  of  officials,  in  whom  are  vested 
the  control  and  supervision  of  the  varied  affairs  of  the 
department. 

The  functions  of  the  different  departments  are  in- 
dicated in  a  general  way  by  their  names.  The  Law 
Department  gives  opinions  on  all  matters  upon  which 
legal  advice  is  required,  draws  mortgages,  leases, 
bonds,  contracts,  or  other  papers,  and  has  charge  and 
control  of  all  litigation  in  which  the  railroad  is  inter- 
ested. The  Treasury  Department  has  charge  of  all 
funds  and  securities,  the  books,  accounts,  and  records, 
and  of  the  receipts  and  disbursements.  The  Traffic 
Department  has  charge  of  the  passenger  and  freight 
traffic,  the  tariffs,  the  interchange  of  business  with 
other  railroads,  and  the  commercial  relations  with  the 
public.  The  Operating  Department  has  charge  of  con- 
struction and  the  maintenance  of  the  railroad,  its  equip- 
ment, the  trains  and  stations,  and  of  the  personnel  and 
discipline  of  the  service. 

It  is  the  purpose  of  this  address  to  treat  mainly  of 
the  operating  division,  and  specifically  of  the  trans- 
portation department  of  the  service. 


RAILWAY  MANAGEMENT  AND  OPERATION    31 

Under  the  head  of  what  is  generahy  known  as  "op- 
eration" is  included  the  administration  of  all  the  physi- 
cal resources  and  activities  of  the  property,  and  to  ac- 
complish this  end  most  effectually  the  operating  service 
is  subdivided  into  the  following  departments :  Road  De- 
partment, Machinery  Department,  Transportation  De- 
partment. The  heads  of  the  different  operating  depart- 
ments report  direct  to  the  General  Manager,  who  in 
turn  reports  to  one  of  the  Vice-Presidents.  As  there 
is,  however,  no  fixed  standard  of  organization  upon  the 
railways  of  this  country,  there  are  frequent  variations 
from  the  general  type  here  presented,  made  necessary 
by  local  conditions  and  circumstances,  so  that  it  is  not 
unusual  to  find  officers  of  similar  titles  performing 
different  duties  upon  different  railways. 

The  completeness  of  an  organization  will  depend  in 
a  large  measure  upon  the  extent  of  territory  over  which 
the  general  officers  have  jurisdiction,  and  the  density 
of  the  traffic.  Roads  of  small  mileage  and  heavy  traffic 
will  require  as  extensive  an  organization  as  a  road  of 
large  mileage  upon  which  the  traffic  is  of  moderate  vol- 
ume. The  highest  differentiation  will  be  found  upon 
those  railroads  which  combine  extensive  mileage  with 
heavy  traffic  of  a  varied  character. 

The  general  officers  are  those  whose  jurisdiction  ex- 
tends in  one  or  more  departments  over  the  entire  line 
of  the  road. 

The  Road  Department  is  usually  in  charge  of  the 
Chief  Engineer,  who  reports  to  and  receives  instruc- 
tions from  the  General  Manager.  The  function  of  the 
department  is  to  construct  and  maintain  the  roadbed 
and  track;  the  bridges,  trestles,  and  culverts;  the  sta- 


32  LECTURES  ON  COMMERCE 

tion  grounds  and  roadways,  station  buildings  and  plat- 
forms; warehouses,  elevators,  docks,  and  wharves;  the 
shop  buildings  and  engine-houses;  the  water-supply,, 
pumping  stations  and  tanks;  the  coal-chutes  and  stor- 
age bins  for  fuel;  the  turntables,  cinder-pits,  and  the 
accessories  necessary  to  make  complete  the  fixed  ele- 
ments of  the  physical  organization  of  the  railroad.  In 
the  administration  of  his  department  the  Chief  Engi- 
neer must  determine  the  standards  of  size,  weight, 
form,  and  capacity  required  of  all  classes  of  track 
material,  the  design  of  bridges,  the  plan  and  construc- 
tion of  buildings,  the  arrangement  of  yards  for  the 
reception  and  departure  of  trains,  the  switching  and 
storage  of  cars,  the  installation  of  interlocking  and 
block  signals,  and  the  combining  and  arrangement  of 
facilities  at  terminals  of  divisions  and  of  the  line  so 
that  the  free  circulation  may  be  assured. 

In  this  work  he  is  assisted  by  a  staff,  adjusted  to  the 
extent  of  territory  under  his  jurisdiction  and  organized 
usually  along  the  following  lines  :  One  or  more  assist- 
ants with  the  drafting  and  clerical  force,  which  admin- 
isters the  main  office  and  constitutes  his  personal  staff. 
This  staff,  subject  to  his  personal  supervision,  makes 
reconnoissances,  preliminary  and  final  surveys  of  new 
lines,  prepares  specifications  and  estimates  of  cost, 
and  has  charge  of  all  new  work  under  construction.  It 
also  assists  in  the  design  of  the  standards  established 
for  the  use  of  the  department,  and  in  the  planning  of 
yards  and  terminals,  and  has  charge  of  the  general 
records  and  statistics  of  the  department.  This  staff 
consists  of  the  following :  an  Engineer  of  Bridges  and 
Buildings,  who  prepares  the  plans  and  specifications  of 


RAILWAY  MANAGEMENT  AND  OPERATION    33 

the  new  structures  and  has  charge  of  their  construction 
and  renewal ;  a  Signal  Engineer,  who  has  charge  of  the 
installation  and  renewals  of  the  appliances  used  for 
block  signals  and  interlocking;  an  Engineer  of  IMain- 
tenance  of  Way.  who  is  in  immediate  charge  of  the 
work  of  maintaining  the  property  to  the  required  stand- 
ard of  efficiency,  and  who  has  general  charge  of  the  ex- 
tensive force  of  men  needed  to  make  the  necessary 
repairs  to  the  roadway,  track,  bridges,  trestles,  culverts, 
buildings,  waterworks,  scales,  and  other  structures,  and 
of  the  working  stock  of  material  and  supplies  required 
for  these  purposes.  To  assist  the  Engineer  of  Mainte- 
nance of  Way  in  the  general  discharge  of  his  duties 
there  are  assigned  to  his  staff  a  Superintendent  of 
Bridges,  a  Superintendent  of  Waterworks,  and  a  Mas- 
ter Carpenter,  who  have  jurisdiction,  each  in  his  own 
line  of  work,  over  the  entire  road. 

The  Machinery  Department  is  in  charge  of  the 
Superintendent  of  IMachinery  or,  as  frequently  desig- 
nated, the  Superintendent  of  Motive  Power,  who  re- 
ports to  and  receives  instructions  from  the  General 
Manager.  The  function  of  the  department  is  to  prepare 
plans  and  specifications  for  the  construction  of  locomo- 
tives and  cars  of  all  the  different  classes  that  are 
required  in  the  service  of  the  road ;  to  establish  stand- 
ards that  will  secure  uniformity  and  interchangeability 
of  parts ;  to  equip  and  operate  the  shops  for  repairs  of 
locomotives  and  cars,  and  to  maintain  the  working 
stock  of  material  and  supplies  needed  for  the  purpose; 
to  inspect  the  locomotives  and  cars  that  are  in  service, 
and  keep  them  in  safe  and  efficient  condition,  with- 
drawing from  service  such  as  are  found  to  be  in  need 


34  LECTURES  ON  COMMERCE 

of  repairs;  to  inspect,  in  accordance  with  established 
rules,  the  cars  received  from  connecting  railways  in  the 
interchange  of  traffic,  and  to  make  adjustment  of 
claims  arising  fromx  damage  and  loss  of  cars  so  used; 
to  employ  the  mechanics  required  in  the  various  metal- 
and  wood-working  trades  of  the  different  shops,  and 
the  inspectors  and  laborers  needed  in  other  classes  of 
the  work;  also,  upon  many  roads,  to  employ  the 
locomotive  enginemen  and  firemen.  The  selection  of 
capable  men  for  the  highly  skilled  work  of  this  depart- 
ment and  the  maintenance  of  discipline  therein  is 
a  duty  requiring  experience  and  judgment. 

The  Superintendent  of  Machinery  upon  large  roads 
is  aided  in  the  management  of  his  department  by  two 
assistants,  one  of  whom  usually  is  given  jurisdiction  in 
the  locomotive  department  and  the  other  in  the  car 
department.  He  also  has  on  his  personal  staff  a 
Mechanical  Engineer,  who  is  usually  directly  in  charge 
of  the  drafting  office,  and  is  immediately  concerned 
with  the  mechanical  standards  and  devices  used  in  the 
department.  Where  a  special  testing  bureau  does  not 
exist,  the  Mechanical  Engineer  is  frequently  charged 
with  the  duty  of  conducting  tests  of  materials  and  of 
the  efficiency  of  locomotives. 

The  Transportation  Department  is  in  charge  of  the 
General  Superintendent,  who  reports  to  and  receives 
instructions  from  the  General  Manager.  The  function 
of  this  department  is  to  conduct  the  transportation  of 
passengers  and  freight  in  a  safe,  economical,  and  effi- 
cient manner ;  to  assign  the  motive  power  so  that  it  may 
be  used  to  the  best  advantage;  to  distribute  the  cars 
for  loading,  and  to  move  them  promptly  so  that  they 


RAILWAY  MANAGEMENT  AND  OPERATION    35 

may  be  made  to  perform  the  fullest  possible  service ;  to 
keep  a  record  of  the  movements  of  cars,  and  to  make 
settlements  with  other  railroads  for  the  use  of  cars 
interchanged;  to  provide  adequate  station  service  so 
that  proper  accommodation  will  be  afforded  for  the 
reception  of  passengers,  the  sale  of  tickets,  and  the 
checking  of  baggage ;  to  provide  for  the  reception  and 
loading  of  freight,  the  preparation  of  way-bills  to  ac- 
company the  freight  in  its  movement  over  the  road, 
and  the  necessary  arrangements  at  its  destination  to 
deliver  the  freight  to  the  consignees,  and  to  collect  the 
charges  for  the  service  performed;  to  prepare  time- 
tables, and  provide  rules  for  the  safe  and  efficient  move- 
ment of  trains;  to  organize  the  personnel  of  the  train 
and  station  service  so  that  employees  may  be  assigned 
with  a  proper  regard  for  their  skill  and  capacity  to  per- 
form the  duties  required  of  them ;  to  provide  and  dis- 
tribute the  fuel  and  supplies  required  for  engines,trains, 
and  stations;  to  provide  adequate  telegraph  and  tele- 
phone service;  to  care  for  injured  passengers  and  em- 
ployees, and  to  adjust  claims  arising  from  loss  and 
damage  to  property ;  to  guard  and  protect  the  property 
belonging  to  or  intrusted  to  the  care  of  the  road;  to 
exercise  supervision  over  employees  in  the  service,  and 
see  that  proper  discipline  is  maintained.  The  efficient 
administration  of  the  Transportation  Department  com- 
prehends the  utilization  of  the  fixed  physical  elements 
supplied  by  the  Road  Department,  and  of  the  movable 
physical  elements  furnished  by  the  Machinery  Depart- 
ment, by  a  highly  trained  organization  of  men  skilled 
in  the  work  of  conducting  train  movements  under  all 
the  varying  conditions  of  weather,  daylight,  and  dark- 


36  LECTURES  ON  COMMERCE 

ness,  to  the  end  of  developing  with  certainty  of  result 
the  safe  and  expeditious  conveyance  of  persons  and 
things  from  one  place  to  another. 

To  assist  the  General  Superintendent  in  this  work, 
he  is  provided  with  a  staff,  consisting  usually  of  one  or 
more  Assistant  General  Superintendents,  who  exercise 
all  the  powers  of  the  General  Superintendent  necessary 
for  the  proper  management  of  the  several  parts  of  the 
road  which  are  under  their  respective  jurisdictions;  a 
Superintendent  of  Transportation,  who  has  general 
charge  of  the  distribution  of  the  car  equipment,  its 
movement,  and  the  records  relating  thereto;  a  Super- 
intendent of  Telegraph,  who  has  charge  of  the  manage- 
ment and  maintenance  of  the  telegraph  and  telephone 
lines  and  service,  and  of  the  distribution  of  standard 
time;  a  Chief  Surgeon,  in  charge  of  the  Surgical  De- 
partment, which  consists  of  Division  Surgeons,  with 
jurisdiction  over  divisions  of  the  road,  and  Local  Sur- 
geons at  the  more  important  stations,  in  charge  also  of 
the  Hospital  Service,  for  the  care  of  the  injured,  and  of 
the  examination  of  applicants  for  employment,  to  deter- 
mine their  visual  power,  color  perception,  and  sense  of 
hearing,  and  their  general  physical  condition  with  ref- 
erence to  their  fitness  for  the  service;  a  Chief  Claim 
Agent,  who  with  a  staff  of  assistants  has  charge  of  the 
settlement  of  claims  for  loss  by  fire,  damage  to  property 
and  live  stock,  and  the  adjustment  of  claims  resulting 
from  personal  injuries;  a  Chief  of  Police,  who  has 
charge  of  the  watchmen,  and  a  corps  of  special  agents 
to  investigate  pecuniary  irregularities  of  the  service, 
and  to  protect  the  passenger  service  and  the  property 
in  charge  of  the  road  from  the*  depredations  of  crim- 
inals. 


RAILWAY  MANAGEMENT  AND  OPERATION    37 

The  General  Manager,  as  the  head  of  the  operating 
service,  must  co-ordinate  the  work  of  his  several  de- 
partments so  as  to  develop  harmony  of  action  and  unity 
of  purpose.    He  must  be  in  close  touch  with  the  Traffic 
Department,  and  adjust  the  schedules  of  the  passenger 
and  freight  trains  to  meet  the  competitive  and  com- 
mercial conditions  existing  in  his  territory  so  as  to 
serve  conveniently  and  efficiently  the  local  needs,  as 
well  as  the  requirements  of  through  traffic.     He  must 
see  that  an  adequate  stock  of  materials  and  supplies  is 
provided  for  maintenance  and  operating  purposes,  and 
that  the  work  of  the  several  departments  is  so  adjust- 
ed in  the  course  of  each  year  that  the  highest  condition 
of  efficiency  will  be  developed  at  the  time  that  the  de- 
mand exists  for  the  heaviest  service.     He  must  control 
and  regulate  the  expenses  to  conform  to  the  revenues, 
and  so  judiciously  direct  the  expenditures  for  improve- 
ments that  immediate  as  well  as  permanent  benefits 
may  be  realized.     He  must  see  that  the  working  rules 
and  regulations  are  strictly  enforced,  that  the  agree- 
ments as  to  wage  schedules  are  rigidly  adhered  to,  and, 
when  differences  of  interpretation  arise  between  the 
officers  and  the  men,  that  the  questions  referred  to  him 
as  arbiter  are  determined  with  judicial  fairness  and 
equity.     He  must  maintain,  along  with  strictness  of 
discipline,  such  a  recognition  on  the  part  of  the  work- 
ing organization  of  his  justness  of  purpose  that  confi- 
dence and  harmony  will  prevail  throughout  the  service 
— conditions  essential  to  the  highest   degree  of  effi- 
ciency. 

When  a  railroad  exceeds  three  hundred  miles  in 
length,  it  is  usually  separated  into  divisions,  and  in 


38  LECTURES  ON  COMMERCE 

each  department  those  officers  whose  jurisdiction  is 
limited  to  a  division  are  known  as  division  officers. 
The  leneth  of  a  division  is  seldom  less  than  one  him- 
dred  miles,  even  in  thickly  populated  sections  of  the 
country,  while  upon  railroads  traversing  thinly  settled 
districts  with  light  traffic  a  division  may  include  from 
five  hundred  to  seven  hundred  miles  of  road.  The 
division  offices  are  usually  located  either  at  the  most 
central  or  at  the  most  important  point  on  each  division. 

The  most  approved  form  of  organization  places  the 
Superintendent  at  the  head  of  the  division  forces  and 
invests  him  with  full  authority  in  the  Transportation, 
Machinery,  and  Road  Department  affairs  of  his  divi- 
sion. The  authority  of  the  general  officers  of  each 
department  becomes  focused  in  the  Superintendent, 
and  as  their  direct  representative  he  exercises  within 
the  limits  of  his  jurisdiction  the  executive  functions  of 
the  head  of  each  department.  In  respect  to  this  concen- 
tration of  authority  the  Superintendent  becomes  vir- 
tually the  General  Manager  of  his  division,  and  his 
responsibilities  correspond  to  the  scope  of  his  authority. 
This  system  gives  great  compactness  to  the  division 
organization,  and  the  large  authority  of  the  Superin- 
tendent, when  well  directed,  is  productive  of  high  effi- 
ciency. 

To  assist  him  in  this  work  he  has  a  staff  composed 
of  a  Train  Master,  in  charge  of  the  Transportation 
service ;  a  Master  Mechanic,  in  charge  of  the  Machinery 
Department  service;  and  a  Road  Master,  in  charge  of 
the  affairs  of  the  Road  Department.  The  division 
officials  are  in  immediate  charge  of  the  extensive  work- 
ing forces  employed  in  the  maintenance  of  the  roadbed, 


RAILWAY  MANAGEMENT  AND  OPERATION    39 

tracks,  fixed  signals,  bridges,  buildings,  and  other 
structures;  the  locomotives,  cars,  shops,  and  engine 
houses ;  and  the  operation  of  the  train  and  station  serv- 
ice. The  standards  of  maintenance,  the  train  schedules, 
and  the  rules  and  regulations  being  established,  it  is 
their  duty  to  see  that  the  work  is  carried  on  along  lines 
Avhich  the  management  adopts  as  the  policy  of  the 
road.  It  is  not  their  concern  whether  the  policy  be  a 
wise  or  unwise  one,  nor  are  they  held  responsible  for 
results,  except  in  so  far  as  the  results  are  dependent 
upon  the  faithful  and  efficient  performance  of  their 
duties.  No  other  phase  of  the  service  presents  such 
condition  of  incessant  activity  as  comes  within  the 
sphere  of  the  division  officers.  Their  ordinary  work  by 
day  and  night,  and  in  addition  their  emergency  work 
whenever  the  necessity  for  it  arises,  demand  on  their 
part  vigorous  health,  untiring  industry,  disregard  of 
personal  comfort,  capacity  to  withstand  fatigue,  rapid- 
ity of  recuperation,  habits  of  sobriety,  and  a  zealous 
ambition  to  overcome  the  obstacles  and  difficulties 
which  they  frequently  encounter. 

The  Road  jMaster  must  maintain  the  roadbed,  track, 
bridges,  trestles,  and  culverts  in  safe  condition  at  all 
times  for  the  movement  of  trains.  Storm,  flood,  and 
fire  only  add  to  this  obligation,  and  in  such  stress  he 
must  exercise  the  greater  diligence  that  the  movement 
of  traffic  may  not  be  interrupted.  The  forces  under  his 
control  consist  of  the  mechanics  and  laborers  employed 
in  the  erection  and  repairs  of  bridges  and  buildings,  the 
maintenance  of  pumping  stations  for  the  water-supply, 
the  repairs  and  renewals  required  for  the  maintenance 
of  roadbed  and  tracks,  the  scales  used  for  weighing 


40  LECTURES  ON  COMMERCE 

cars,  and  the  apparatus  used  for  interlocking  and  block 
signals.  He  is  assisted  in  this  work  by  Supervisors  of 
Track,  of  Bridges  and  Buildings,  of  Waterworks,  of 
Scales,  and  of  Signals. 

The  Master  Mechanic  must  not  only  maintain  the 
general  condition  and  efficiency  of  the  locomotives,  but 
in  the  season  of  heavy  traffic — usually  coincident  with 
the  severest  weather — he  must  receive  the  engines  as 
they  come  off  the  road,  frequently  in  more  or  less  dis- 
abled condition,  have  them  cleaned,  inspected,  repaired, 
furnished  with  fuel  and  water,  and  made  ready  for 
service  in  the  shortest  possible  time.  The  cars  like- 
wise require  inspection  and  repairs,  which  must  be 
made,  if  possible,  without  withdrawing  them  from 
service;  and  when  that  is  unavoidable,  they  must  be 
returned  to  service  with  the  least  possible  delay.  He  is 
assisted  by  a  General  Foreman,  with  supervision  over 
the  different  departments  of  the  shops,  in  which  there 
are  other  foremen  immediately  in  charge  of  the  ma- 
chinists, the  blacksmiths,  the  boiler-makers,  the  carpen- 
ters, the  tinners,  the  painters,  and  the  car  repairers ;  a 
Foreman  of  Engine  House,  in  direct  charge  of  the  in- 
spection and  running  repairs  of  engines,  their  prepara- 
tion for  road  service,  the  forces  employed  in  this  work, 
and  of  the  enginemen  and  firemen  who  make  up  the 
engine  crews ;  and  a  Storekeeper,  in  charge  of  the  ma- 
terials and  supplies  used  in  the  shops  and  by  the  loco- 
motives when  on  the  road. 

The  Train  Master  must  see  that  the  trains  are  made 
up  and  run  in  accordance  with  the  established  sched- 
ules. When  any  interruption  occurs,  he  must  proceed 
at  once  to  the  place  and  arrange  for  the  resumption  of 


RAILWAY  MANAGEMENT  AND  OPERATION    41 

service,  and  when  serious  detentions  are  likely  to  result, 
he  must  arrange  to  detour  the  important  trains  and  pass 
around  the  place  where  the  obstruction  exists  with  the 
least  delay,  using  the  most  available  foreign  lines  of 
railway  for  the  purpose.  He  has  jurisdiction  over  the 
yards  and  stations,  as  well  as  the  line  of  road  embraced 
in  his  district  or  division.  He  must  see  that  freight 
cars  are  properly  distributed,  and  that  they  are 
promptly  loaded  or  unloaded,  and  forwarded.  He  has 
direct  charge  of  all  the  engine  crews  and  train  crews, 
and  must  know  that  they  understand  the  rules  and  are 
otherwise  qualified  to  perform  their  duties.  He  must 
give  especial  attention  to  the  weight  or  tonnage  of 
freight  trains,  and  know  that  locomotives  are  loaded 
to  their  full  capacity.  He  is  responsible  for  the  proper 
and  safe  movement  of  trains,  and  must  see  that  all 
the  rules,  and  the  special  instructions  of  the  time-table, 
are  strictly  observed.  He  must  give  his  whole  time  and 
attention  to  the  service ;  his  office  is  one  which  is  never 
closed,  his  work  never  completed;  days,  nights,  and 
Sundays  are  alike;  the  ceaseless  movement  of  trains 
knows  no  ending.  He  is  assisted  by  a  Chief  Train  Dis- 
patcher, in  direct  charge  of  train  movements,  the  dis- 
tribution of  cars,  the  telegraph  lines  and  operators,  and 
the  office  records  and  statistics ;  and  by  a  Yard  Master 
at  each  place  where  there  are  yards  in  which  trains  are 
received  and  made  up  and  where  cars  are  switched  and 
stored. 

For  purposes  of  train  service,  a  division,  when  two 
hundred  miles  or  more  in  length,  is  divided  into  dis- 
tricts, which  are  usually  adjusted  to  the  length  of  a 
freight     run,     approximately     one     hundred     miles. 


42  LECTURES  ON  COMMERCE 

Freight  train  and  engine  crews  are  changed  at  the 
end  of  each  district,  passenger  train  crews  run  over 
two  or  more  districts,  while  passenger  engine  crews 
generally  change  on  each  district.  Engines  are  changed 
at  the  end  of  each  district,  although  it  is  not  unusual  in 
passenger  service  and  upon  fast  freight  trains  which 
have  little  or  no  way  w^ork  to  do,  for  the  engines  to 
run  through  over  two  districts,  changing  crews  at  dis- 
trict terminals.  At  each  district  terminal  there  is  a 
yard  for  trains,  with  an  engine-house,  turntable,  coal- 
chute,  water-tank,  and  cinder-pit  for  the  locomotives. 
Day  and  night  forces  are  employed  at  such  points  to 
provide  for  continuous  service. 

Station  service  is  organized  quite  apart  from  train 
service,  although  intimately  associated  with  it.  The 
person  in  charge  of  a  station  is  known  as  the  Station 
Agent,  and  wdiere  the  business  is  sufficient  to  justify  it 
he  is  assisted  by  a  Telegraph  Operator,  a  Ticket  Clerk, 
a  Baggageman,  a  Freight  Clerk,  and  the  necessary 
force  of  laborers  for  handling  freight.  In  large  cities 
the  station  organization  becomes  highly  complex;  the 
passenger  and  freight  service  is  separated ;  departments 
take  the  place  of  individuals,  and  large  forces  of  men 
are  employed;  but  in  principle  there  is  no  difference 
between  the  organization  of  a  large  and  a  small  sta- 
tion, and  in  freight  service  the  person  at  the  head  of  the 
station  force  is  known  upon  all  railroads  as  the 
"Agent."  The  methods  which  prevail  in  the  handling 
of  passenger  traffic,  both  in  station  and  train  service, 
are  so  well  known  that  it  is  not  necessary  to  refer  to 
them  here. 

In  freight  traffic  the  station  service  is  adjusted  to 


RAILWAY  MANAGEMENT  AND  OPERATION    43 

conform  to  the  two  methods  which  prevail  in  the  ship- 
ment of  freight,  namely,  full  car  loads  and  less  than  car 
loads.  In  the  case  of  car-load  freight,  the  shipper  loads 
the  car  and  the  consignee  unloads  it,  the  railroad  fur- 
nishing no  labor  for  the  purpose.  Cars  containing  car- 
load freight  are  placed  for  loading  and  unloading  on 
public  tracks  conveniently  located  and  accessible  to 
teams,  or  are  delivered  directly  to  the  private  tracks  of 
the  different  industries.  Less  than  car-load  freight  is 
delivered  by  the  shippers  at  the  railroad  freight-house, 
where  it  is  received  and  loaded  into  cars,  and  at  its 
destination  is  unloaded  and  delivered  through  the 
freight-house  to  the  consignees  by  the  employees  of  the 
railroad.  The  tariff  rates  for  car-load  freight  are  much 
lower  than  for  the  smaller  quantities  shipped  in  less 
than  car  loads. 

When  freight  is  received,  whether  in  car  loads  or  in 
packages,  it  is  weighed,  either  upon  track  scales  or  on 
warehouse  scales,  to  determine  the  charge  to  be  made 
and  the  weight,  rate,  and  charges  are  entered  upon  the 
way-bill  which  accompanies  every  shipment  of  freight 
to  its  destination. 

At  the  close  of  business  for  the  day,  the  cars  which 
have  been  loaded  at  large  stations  are  gathered  up  by 
the  yard  engines  and  made  into  trains  under  the  direc- 
tion of  the  Yard  Master,  who  computes  the  tonnage, 
and,  when  equal  to  the  rating  of  the  locomotive  as- 
signed, the  train  is  delivered  to  the  conductor  with  the 
way-bills,  and  is  ready  for  its  trip  on  the  road.  While 
the  conductor  is  comparing  the  way-bills  with  the  num- 
bers and  initials  of  the  cars  and  checking  the  tonnage 
of  the  train,  his  brakemen  have  coupled  the  engine, 


44  LECTURES  ON  COMMERCE 

tested  the  air  brakes,  and  examined  the  doors  and  seals. 
The  conductor  then  compares  his  train  orders  with 
those  held  by  the  engineman,  enters  his  time  of  de- 
parture on  the  station  register,  and  gives  the  signal  to 
start. 

The  movement  of  trains  upon  nearly  all  of  the  rail- 
roads of  this  country  is  now  conducted  under  a  code  of 
rules  formulated  by  the  American  Railway  Association, 
and  generally  known  as  the  "Standard  Code  of  Train 
Rules."  This  code  is  recognized  as  the  most  approved 
practice,  and  in  addition  to  its  rules  contains  a  series 
of  definitions  which  explain  so  many  of  the  terms  used 
in  railway  service  that  they  are  given  here  complete : 

Train. — An  engine,  or  more  than  one  engine  coupled,  with  or 
without  cars,  displaying  markers. 

Regular  Train. — A  train  represented  on  the  time-table.  It 
may  consist  of  sections. 

Section. — One  of  two  or  more  trains  running  on  the  same 
schedule  displaying  signals  or  for  which  signals  are  displayed. 

Extra  Train. — A  train  not  represented  on  the  time-table.  It 
may  be  designated  as — 

Extra — for  any  extra  train,  except  work  extra; 

Work  Extra — for  work-train  extra. 

Superior  Train. — A  train  having  precedence  over  other  trains. 

A  train  may  be  made  superior  to  another  train  by  Right, 
Class,  or  Direction. 

Right  is  conferred  by  train  order;  Class  and  Direction  by 
time-table. 

Right  is  superior  to  Class  or  Direction.  Direction  is  superior 
as  between  trains  of  the  same  class. 

Train  of  Superior  Right. — A  train  given  precedence  by  train 
order. 

Train  of  Superior  Class. — A  train  given  precedence  by  time- 
table. 

Train  of  Superior  Direction. — A  train  given  precedence  in 
the  direction  specified  in  the  time-table  as  between  trains  of  the 
same  class. 


RAILWAY  MANAGEMENT  AND  OPERATION   49 

Time-Tablc. — The  authority  for  the  movement  of  regular 
trains  subject  to  the  rules.  It  contains  the  classified  schedules 
of  trains,  with  special  instructions  relating  thereto. 

Schedule— T\\2X  part  of  a  time-table  which  prescribes  the 
class,  direction,  number,  and  movement  of  a  regular  train. 

Single  Track. — A  track  upon  which  trains  are  operated  in 
both  directions  by  time-table  or  by  train  orders. 

Double  Track. — An  arrangement  of  two  tracks  upon  each  of 
which  trains  are  ordinarily  operated  in  one  direction  by  time- 
table or  by  train  orders. 

Siding. — An  auxiliary  track  used  exclusively  for  meeting  or 
passing  trains. 

Yard. — A  system  of  tracks  within  defined  limits  provided  for 
the  making  up  of  trains,  storing  of  cars,  and  other  purposes, 
over  which  movements  not  authorized  by  time-table,  or  by  train 
order,  may  be  made,  subject  to  prescribed  signals  and  regulations. 

Yard  Engine. — An  engine  assigned  to  yard  service  and  work- 
ing within  yard  limits. 

Pilot. — A  person  assigned  to  a  train  when  the  engineman  or 
conductor,  or  both,  are  not  fully  acquainted  with  the  physical 
characteristics  or  running  rules  of  the  road,  or  portion  of  the 
road,  over  which  the  train  is  to  be  moved. 

Fixed  Signal.— A  signal  of  fixed  location  indicating  a  condi- 
tion affecting  the  movement  of  a  train. 

The  129  rules  of  the  code  relate  to  standard  time, 
time-tables,  visible  signals,  audible  signals,  train  sig- 
nals, use  of  signals,  classification  of  trains,  movement 
of  trains  by  train  rules,  movement  of  trains  by  train 
orders,  and  the  forms  of  train  orders.  These  rules  and 
the  forms  of  train  orders  must  be  thoroughly  under- 
stood by  every  conductor  and  engineman  in  road 
service. 

When  a  train  starts  out  on  the  road,  its  movement 
is  watched  day  and  night  by  the  operators  at  every  tele- 
graph office,  and  the  time  every  train  passes  each  sta- 
tion is  promptly  telegraphed  to  the  train  dispatcher, 


46  LECTURES  ON  COMMERCE 

who  enters  the  time  on  a  record  known  as  the  train 
register,  which  is  kept  constantly  before  him.  At  each 
station  is  a  special  form  of  fixed  signal,  known  as  the 
train-order  signal,  which  is  displayed  to  stop  trains  by 
direction  of  the  train  dispatcher,  who  is  thus  enabled  to 
control  the  movements  of  trains  and  to  communicate 
with  them  when  desired. 

The  movements  of  regular  trains  in  both  passenger 
and  freight  service  are  governed  by  the  time-table,  and 
so  long  as  they  keep  on  time  they  do  not  need  any 
assistance  to  help  them  over  the  road.  When,  however, 
they  become  late,  the  train  dispatcher's  assistance  is 
often  required.  In  addition  to  the  regular  trains,  many 
extra  trains  are  run  which  are  dependent  entirely  upon 
the  orders  issued  by  the  train  dispatcher  for  their  right 
to  proceed. 

The  fundamental  principle  of  single-track  practice 
in  this  country  is  that  an  inferior  train  must  keep  out  of 
the  way  of  a  superior  train,  and  the  entire  structure  of 
the  "Standard  Code"  is  based  upon  that  idea.  Trains 
of  the  first  class  are  superior  to  those  of  the  second; 
trains  of  the  second  class  are  superior  to  those  of  the 
third ;  and  so  on ;  and  extra  trains  are  inferior  to  reg- 
ular trains.  The  terms  "passenger"  and  "freight"  are 
descriptive  and  do  not  refer  to  class.  First-class  trains 
may  be  either  passenger  or  freight,  according  to  their 
importance.  The  class  of  a  regular  train  is  determined 
by  the  management  when  its  schedule  is  established, 
and  is  shown  upon  the  time-table.  Usually  passenger 
trains  are  first  class,  fast  freight  trains  are  second  class, 
and  slow  freight  trains  third  class.  All  regular  trains 
are  numbered,  and  are  officially  known  only  by  their 


RAILWAY  MANAGEMENT  AND  OPERATION    47 

numbers.  The  fanciful  names  which  are  sometimes 
given  to  trains  have  no  place  in  the  classification.  All 
regular  trains  in  one  direction  have  odd  numbers,  and 
in  the  opposite  direction  even  numbers.  Extra  trains 
are  designated  by  the  numbers  of  their  engines  and  the 
direction  in  which  they  are  moving.  All  trains  in  one 
direction  are  superior  to  trains  of  the  same  class  in  the 
opposite  direction,  the  superior  direction  being  specified 
upon  the  time-table.  Regular  trains  hold  their  right 
and  class  for  twelve  hours;  when  over  twelve  hours 
late,  they  can  proceed  only  by  train  order,  and  must 
then  run  as  extra  trains. 

A  train  must  not  leave  its  initial  station  until  it  is 
ascertained  whether  all  trains  due  which  are  superior 
or  of  the  same  class  have  arrived  or  left.  A  train  must 
not  start  from  a  station  until  a  signal  to  do  so  is  given 
by  the  conductor.  At  meeting-points  on  single  track 
between  trains  of  the  same  class,  the  inferior  train  must 
clear  the  main  track  before  the  leaving  time  of  the 
superior  train.  At  meeting-points  between  trains  of 
different  classes,  the  inferior  train  must  take  the  siding 
and  clear  the  superior  train  by  at  least  five  minutes.  An 
inferior  train  must  keep  at  least  five  minutes  off  the 
time  of  a  superior  train  moving  in  the  same  direc- 
tion. Switches  must  be  left  set  and  locked  for  the  main 
track  after  having  been  used. 

The  foregoing  principles  govern  the  movements  of 
regular  trains,  and  by  their  observance  conductors  and 
enginemen  would  be  enabled  to  make  their  way  over 
the  road,  were  it  not  that  extra  trains  are  being  con- 
tinually run,  for  the  movements  of  which  provision 
must  be  made  through  the  medium  of  train  orders ;  in 


48  LECTURES  ON  COMMERCE 

addition  to  which  occasions  arise  when  it  is  of  advan- 
tage to  readjust  the  relations  of  regular  trains,  which 
is  also  done  by  means  of  train  orders. 

As  it  is  of  the  utmost  importance  that  train  orders 
should  be  understood  alike  by  all  who  receive  them, 
the  most  stringent  rules  have  been  adopted  to  govern 
their  issuance,  transmission,  delivery,  and  execution. 
There  are  thirteen  standard  forms  of  train  orders, 
which  are  used  for  the  following  purposes : 

Form  A. — Fixing  meeting-point  for  opposing  trains. 
Form  B. — Directing  a  train  to  pass  or  run  ahead  of  another 
train. 

Form  C. — Giving  a  train  the  right  over  an  opposing  train. 

Form  D. — Giving  regular  trains  the  right  over  a  given  train. 

Form  E. — Time  orders. 

Form  F. — Sections. 

Form  G. — Extra  trains. 

Form  H. — Work  extra. 

Form  J. — Holding  order. 

Form  K. — Annulling  a  regular  train. 

Form  L. — Annulling  an  order. 

Form  M. — Annulling  part  of  an  order. 

Form  P. — Superseding  an  order  or  a  part  of  an  order. 

The  train  dispatcher  is  the  only  person  authorized 
to  issue  train  orders,  which  are  transmitted  by  tele- 
graph and  numbered  consecutively  each  day,  beginning 
with  No.  I  at  midnight.  Each  order  must  be  given  in 
the  same  words  to  all  persons  or  trains  addressed.  Each 
train  order  must  be  written  in  full  in  a  book  provided 
for  the  purpose  at  the  office  of  the  train  dispatcher,  and 
with  it  recorded  the  names  of  those  who  have  signed 
for  the  order,  the  time  and  the  signals  which  show 
when  and  from  what  offices  the  order  was  repeated  and 
the  responses  transmitted,  and  the  train  dispatcher's 


RAILWAY  MANAGEMENT  AND  OPERATION    49 

initials.     These  records  must  be  made  at  once,   and 
never  from  memory  or  memoranda. 

Train  orders  are  of  two  classes,  designated  by  the 
number  of  the  form  used  and  the  color  of  the  paper 
upon  which  they  are  written.  The  "31"  train  order  is 
written  upon  yellow  paper,  is  used  to  restrict  the 
superiority  of  a  train,  and  must  be  acknowledged  by  the 
conductor  before  it  is  made  complete.  The  "19"  train 
order  is  written  upon  green  paper,  can  be  used  for  any 
purpose  except  to  restrict  the  superiority  of  a  train, 
and  does  not  require  the  signature  of  the  conductor 
before  it  is  made  complete. 

The  specific  requirements  of  the  "Standard  Code" 
as  to  the  transmission  of  train  orders  are  as  follows  : 

To  transmit  a  train  order,  the  signal  "31"  or  the  signal  "19" 
must  be  given  to  each  office  addressed. 

A  train  order  to  be  sent  to  two  or  more  offices  must  be  trans- 
mitted simultaneously  to  as  many  of  them  as  practicable.  The 
several  addresses  must  be  in  the  order  of  superiority  of  trains, 
each  office  taking  its  proper  address.  When  not  sent  simulta- 
neously to  all,  the  order  must  be  sent  first  to  the  superior  train. 

Operators  receiving  train  orders  must  write  them  in  mani- 
fold during  transmission,  and  if  they  cannot  at  one  writing  make 
the  requisite  number  of  copies,  must  trace  others  from  one  of 
the  copies  first  made. 

When  a  "31"  train  order  has  been  transmitted,  operators  must 
(unless  otherwise  directed)  repeat  it  at  once  from  the  manifold 
copy  in  the  succession  in  which  the  several  offices  have  been  ad- 
dressed, and  then  write  the  time  of  repetition  on  the  order.  Each 
operator  receiving  the  order  should  observe  whether  the  others 
repeat  correctly. 

Those  to  whom  the  order  is  addressed,  except  enginemen, 
must  read  it  aloud  and  then  sign  it,  and  the  operator  will  send 
their  signatures  preceded  by  the  number  of  the  order  to  the  train 
dispatcher.     The  response   "complete,"   and  the  time,  with  the 


50  LECTURES  ON  COMMERCE 

initials  of  the  train  dispatcher,  will  then  be  given  by  the  train 
dispatcher.  Each  operator  receiving  this  response  will  then 
write  on  each  copy  the  word  "complete,"  the  time,  train  dis- 
patcher's initials,  his  own  last  name  in  full,  and  then  deliver  a 
copy  to  each  person  addressed,  except  enginemen.  The  copy 
for  each  engineman  must  be  delivered  to  him  personally  by  the 
conductor,  and  the  engineman  must  read  it  aloud  to  the  con- 
ductor before  proceeding. 

The  requirements  as  to  the  ''19"  order  are  some- 
what less  exacting,  as  it  is  used  only  for  inferior  pur- 
poses. Trains  must  be  stopped  for  "31"  orders,  but 
"19"  orders  may  be  delivered  while  trains  are  in  mo- 
tion. It  is  the  duty  of  the  train  dispatcher  to  anticipate 
the  necessity  for  train  orders  and  have  them  ready  for 
delivery  immediately  on  arrival  of  trains.  Three  dis- 
patchers are  assigned  to  a  district,  each  dispatcher 
working  eight  hours,  then  making  transfer  to  the  next, 
so  that  the  service  is  continuous  throughout  the  day 
and  night.  The  successful  operation  of  the  train  service 
is  largel}^  dependent  upon  the  intelligence,  skill,  and 
judgment  of  the  train  dispatcher. 

Of  recent  years  more  care  has  been  exercised  in  the 
selection  of  men  for  the  transportation  department,  and 
civil-service  rules  have  been  applied  with  much  success 
to  this  branch  of  the  service.  Regulations  as  to  em- 
ployment and  promotion  are  in  effect  as  follows  : 

Applicants  for  employment  must  be  of  sound  health,  free 
from  physical,  mental,  or  moral  infirmities,  and  produce  satis- 
factory evidence  of  previous  record,  character,  and  ability. 

Employees  will  be  selected  from  applicants  whose  character, 
intelligence,  physical  capacity,  and  general  appearance  indicate 
that  their  services  will  be  efficient  and  satisfactory,  and  who  are 
likely  to  develop  ability  sufficient  to  merit  advancement  in  the 
service. 


V  Of 

RAILWAY  MANAGEMENT  AND  OPERATION    51 

For  positions  above  that  of  laborer,  no  person  will  be  em- 
ployed who  cannot  read  and  write  the  English  language,  or  who 
does  not  possess  a  knowledge  of  the  rudiments  of  arithmetic. 

Persons  deficient  in  hearing,  visual  power,  or  color  perception 
will  not  be  employed  in  any  branch  of  the  service  involving  the 
use  of  signals  or  the  movement  of  engines  or  trains. 

All  employees  will  be  regarded  as  in  the  line  of  promotion, 
advancement  depending  upon  their  loyalty  to  the  company's  in- 
terests, faithful  discharge  of  duty,  and  capacity  for  increased 
responsibility. 

Examinations  for  promotion  will  be  held  from  time  to  time, 
as  may  be  required. 

Examinations  for  promotion  in  train  service  will  Include : 
physical  condition,  rules  of  the  Transportation  Department,  air- 
brake practice,  and  such  special  examinations  as  the  regulations 
of  other  departments  may  require. 

For  promotion  to  position  of  conductor  the  applicant  must 
have  had  two  years'  experience  in  train  service,  of  which  the  last 
year  shall  have  been  in  freight-train  service. 

Employees  desiring  promotion  to  conductors  must  make  ap- 
plication in  their  own  handwriting  to  the  Train  Master  for  ex- 
amination, in  which  they  must  state  their  age,  experience,  and 
general  qualifications  for  the  position. 

Applicants  for  the  position  of  engineman  must,  in  addition 
to  the  requirements  of  the  Machinery  Department,  pass  examina- 
tion as  to  their  physical  condition,  and  on  the  rules  of  the  Trans- 
portation Department. 

Applicants  will  be  examined  in  the  order  of  their  seniority, 
merit  and  ability  being  equal.  Those  who  pass  will  rank  in  the 
service  from  the  date  of  their  examination  on  rules  of  the  Trans- 
portation Department. 

xA.pplicants  who  fail  on  the  first  examination  must  within  one 
year  make  written  application  for  re-examination.  Those  who 
fail  on  the  second  examination  will  be  dropped  from  the  service. 
Flagmen,  brakemen,  or  firemen  who  do  not  apply  for  examina- 
tion within  five  years  may  be  dropped  from  the  service. 

The  object  of  fixing  a  limit  of  five  years  to  the  term 
of  service  of  a  flagman,  a  brakeman,  and  a  fireman  is 


52  LECTURES  ON  COMMERCE 

that  these  occupations  are  considered  as  preparatory- 
training  for  the  positions  of  conductor  and  of  engine- 
man,  which  are  the  fixed  types  of  employment  in  trans- 
portation service;  and  a  person  who  has  not  the  ca- 
pacity to  quahfy  for  either  of  these  positions  after  five 
years  of  service  is  not  hkely  to  do  so  at  any  time,  and 
should  make  way  for  those  who  are  more  capable  and 
progressive.  In  respect  to  this  regulation,  however,  the 
practice  varies  upon  different  railroads. 

To  the  applicant  who  passes  the  examinations  suc- 
cessfully the  date  of  his  principal  examination  is  of 
considerable  consequence,  as  it  establishes  his  seniority 
rank  in  the  service,  and  will  thereafter  affect  his  right 
to  employment  and  to  choice  of  runs,  in  the  selection  of 
which  the  men  oldest  in  continuous  service  have  prefer- 
ence. When  it  is  considered  that  upon  well-established 
roads  a  conductor  or  an  engineman  may  have  to  serve 
twenty  years  in  freight  service  before  his  turn  comes 
for  a  passenger  run,  it  is  an  object  to  gain  promotion 
as  early  as  possible  in  his  career. 

For  many  years  the  practice  in  railway  service  of 
administering  discipline  to  those  who  after  due  investi- 
gation are  found  guilty  of  offenses  requiring  punish- 
ment was  by  reprimand,  suspension  without  pay,  fines, 
and  dismissal.  The  practice  of  applying  fines  was 
discontinued  some  years  ago,  upon  the  theory  that  the 
principal  sufferers  from  such  penalties  were  the  families 
of  the  men  or  those  dependent  upon  them  for  support, 
who  were  in  no  wise  responsible  for  their  wrongdoing. 
Similarly,  the  practice  of  suspension  without  pay  has 
more  recently  been  to  a  considerable  extent  abolished, 
and  in  lieu  thereof  a  system  of  recoid  suspension  inau- 


RAILWAY  MANAGEMENT  AND  OPERATION    53 

giirateci,  which  is  found  to  be  more  humane,  and  as  a 
deterrent  fully  as  effective.  Under  this  system  the  per- 
son at  fault  is  given  a  suspension  varying  in  length 
with  the  character  of  the  offense,  but,  instead  of  losing 
actual  time  and  pay,  he  is  permitted  to  continue  at 
work  and  the  suspension  is  entered  against  his  record. 
Should  his  record  show  in  the  course  of  time  a  series  of 
suspensions  indicating  habitual  carelessness,  negli- 
gence, or  incompetency,  he  is  dismissed  from  the  serv- 
ice. Provision  is  made,  however,  under  this  system, 
for  extinguishing  the  unfavorable  entries  by  periods  of 
good  conduct,  so  that  in  course  of  time  a  record  may 
be  cleared.  A  "clear"  record  is  one  in  which  all  the 
unfavorable  entries  have  been  extinguished.  A  "per- 
fect" record  is  one  against  which  no  unfavorable  entries 
have  been  made.  While  the  tendency  at  the  present 
time  is  to  exercise  much  forbearance,  and  to  view  with 
consideration  those  faults  arising  from  errors  of  judg- 
ment as  distinguished  from  those  resulting  from  negli- 
gence, and  in  all  cases  to  give  the  offender  the  benefit 
of  a  previous  good  record,  there  are  certain  offenses  for 
which  the  capital  punishment  of  dismissal  must  inevi- 
tably follow  in  order  that  discipline  may  be  efficiently 
maintained,  the  principal  one  being  intoxication  on 
duty,  for  which  no  excuse  is  accepted. 

Within  the  past  two  years  a  few  of  the  leading  roads 
of  the  country  have  adopted  a  system  of  pensions,  for 
the  purpose  of  enabling  officers  and  employees  who 
have  rendered  the  road  long  and  faithful  service  to 
retire  when  they  have  attained  an  age  necessitating 
relief  from  duty.  The  most  generous  conditions  gov- 
erning retirement  and  the  allowance  of  pensions,  and 


54  LECTURES  ON  COMMERCE 

probably    the   best    example    of   the   railway   pension 

system,  are  set  forth  in  the  following  regulations : 

The  benefits  of  the  pension  system  apply  only  to  those  per- 
sons who  have  been  required  to  give  their  entire  time  to  the 
company. 

All  officers  and  employees  who  have  attained  the  age  of 
seventy  years  shall  be  retired.  Such  of  them  as  have  been  ten 
years  in  the  service  shall  be  pensioned. 

Locomotive  enginemen  and  firemen,  conductors,  flagmen,  and 
brakemen,  train  baggagemen,  yard  masters,  switchmen,  bridge 
foremen,  track  foremen,  and  supervisors  who  have  attained  the 
age  of  sixty-five  years  may  be  retired.  Such  of  them  as  have 
been  ten  years  in  the  service  shall  be  pensioned  when  retired. 

Officers  and  employees  between  sixty-one  and  seventy  years 
of  age  who  have  been  ten  years  in  the  service  and  who  have  be- 
come incapacitated  may  be  retired  and  pensioned. 

In  case  an  employee  between  sixty-one  and  seventy  years  of 
age  claims  that  he  is,  or  should  his  employing  officer  consider 
him,  incapacitated  for  further  service,  he  may  make  application 
or  be  recommended  for  retirement,  and  the  Board  of  Pensions 
shall  determine  whether  or  not  he  shall  be  retired  from  the 
service.  Physical  examination  shall  be  made  of  employees  recom- 
mended for  retirement  who  are  under  seventy  years  of  age,  and 
a  report  thereof,  with  the  recommendation  of  the  Chief  Sur- 
geon, shall  be  transmitted  to  the  Board  of  Pensions  for  consid- 
eration in  determining  such  cases. 

The  terms  "service"  and  "in  the  service"  will  refer  to  employ- 
ment upon  or  in  connection  with  any  of  the  railroads  operated 
by  the  company,  and  the  service  of  any  employee  shall  be  con- 
sidered as  continuous  from  the  date  from  which  he  has  been 
continuously  employed  upon  such  railroads,  whether  prior  to  or 
subsequent  to  their  control  by  the  company.  [This  regulation  is 
especially  favorable  to  the  beneficiaries  of  the  pension  system, 
as  it  provides  for  continuity  of  service  regardless  of  changes  of 
management  or  of  consolidation  of  railway  properties.] 

In  computing  service,  it  shall  be  reckoned  from  the  date  since 
which  the  person  has  been  continuously  in  the  service  to  the 
date  when  retired.     Leave  of  absence,  suspension,  dismissal  fol- 


RAILWAY  MANAGEMENT  AND  OPERATION    55 

lowed  by  reinstatement  within  one  year,  or  temporary  lay-off 
on  account  of  reduction  of  force,  when  unattended  by  other  em- 
ployment, is  not  to  be  considered  as  a  break  in  the  continuity  of 
service.  Persons  who  leave  the  service  thereby  relinquish  all 
claims  to  the  benefit  of  pension  allowances. 

The  pension  allowances  authorized  are  upon  the  following 
basis : 

For  each  year  of  service  an  allowance  of  i  per  cent,  of  the 
average  regular  monthly  pay  received  for  the  ten  years  preceding 
retirement.  Thus,  by  way  of  illustration :  If  an  employee  has 
been  in  the  service  for  forty  years  and  has  received  on  an  average 
for  the  last  ten  years  $100  per  month  regular  wages,  his  pension 
allowance  would  be  40  per  cent,  of  $100,  or  $40  per  month. 

When  pension  allowances  shall  be  authorized,  pursuant  to 
these  regulations,  they  shall  be  paid  monthly  during  the  life  of 
the  beneficiary;  provided,  however,  that  the  company  may  with- 
hold its  allowance  in  case  of  gross  misconduct  on  his  part. 

To  the  end  of  preserving  direct  personal  relations  between 
the  company  and  its  retired  employees,  and  that  they  may  con- 
tinue to  enjoy  the  benefit  of  the  pension  system,  no  assignment 
of  pensions  will  be  permitted  or  recognized. 

The  acceptance  of  a  pension  allowance  does  not  debar  a  re- 
tired employee  from  engaging  in  other  business,  but  such  person 
cannot  re-enter  the  service  of  the  company. 

The  administration  of  the  Pension  Department  is 
conducted  by  a  board  of  officers  of  the  road,  including 
usually  the  heads  of  the  different  operating  depart- 
ments. This  board  has  power,  subject  to  the  regula- 
tions, to  determine  the  eligibility  of  employees  to 
receive  pension  allowances  and  to  fix  the  amount  of 
such  allowances. 

The  adoption  of  a  pension  system  by  railroads 
logically  carries  with  it  the  adoption  of  a  maximum 
age  limit  at  which  persons  may  enter  the  service;  this 
limit  is  placed  at  thirty-five  years. 

The  effect  of  the  pension  system,  it  is  anticipated, 


56  LECTURES  ON  COMMERCE 

will  be  an  advance  in  the  general  efficiency  of  the 
service  by  reducing  the  average  age  of  employees,  and 
thereby  securing  greater  average  capacity  for  the  per- 
formance of  duties  which  upon  railways  are  so  largely 
of  a  physical  character.  The  attainment  of  this  result, 
combined  with  generous  provision  for  the  aged  and 
infirm,  will,  it  is  believed,  commend  the  system  to  the 
approval  of  the  public,  which  is  so  vitally  interested  in 
the  development  and  continued  improvement  of  meth- 
ods of  railway  management  and  operation. 


RAILWAY  MAIL  SERVICE:    A  HISTORICAL 

SKETCH. 

GEORGE    GERARD    TUNELL,    SECRETARY    TO    THE    PRESI- 
DENT,  CHICAGO  &  NORTHWESTERN  RAILWAY  CO. 

At  the  time  our  first  railroads  were  opened  the  mail 
was  carried  on  horseback,  by  sulkies,  stages,  four-horse 
post-coaches,  packets,  and  steamboats.  As  the  cities 
that  could  be  served  by  steamboats  were  few  in  number, 
the  expedition  that  could  be  given  the  mail  was  meas- 
ured by  the  speed  and  endurance  of  the  horse.  In  favor- 
able weather,  when  the  roads  were  in  good  condition, 
the  mails  were  carried  with  fair  dispatch,  and  were 
delivered  promptly  at  the  appointed  time.  During  a 
portion  of  the  year  1833  the  express  mail  was  carried 
from  Philadelphia  to  New  York,  a  distance  of  ninety 
miles,  in  six  hours,  at  an  average  speed  of  fifteen  miles 
per  hour.  But  this,  of  course,  was  an  extraordinary 
performance,  and  was  only  warranted  by  the  disturbed 
and  excited  condition  of  public  affairs  that  then  pre- 
vailed. To  maintain  this  speed  the  horses  had  to  be 
changed  every  five  miles.  It  was  thus  a  relay  race 
against  time,  with  eighteen  contestants.  Two  horses 
being  needed  to  carry  the  mail,  seventy-two  horses  were 
required  for  each  day's  service,  with  reserves  to  take 
the  places  of  the  disabled.  The  contractor  received  one 
dollar  per  mile  run  by  each  horse,  a  sum  far  in  excess 
of  the  revenue  received  by  the  Post-Office  Department 
from  the  mail  carried. 

The  foregoing  example  presents  one  extreme.    The 

57 


58  LECTURES  ON  COMMERCE 

other  shows  the  all  but  impassable  roads  of  the  wet  sea- 
sons, the  heavy  stages  and  post-coaches  scarcely  mov- 
ing, the  horses  straining  with  all  their  might  to  drag 
these  ponderous  vehicles,  often  down  to  their  very 
axles  in  the  mud,  at  the  rate  of  three  or  four  miles  per 
hour. 

Such  being  the  condition  of  affairs,  it  would  nat- 
urally be  supposed  that  the  mail  would  have  been 
wholly  transferred  to  the  railways  as  soon  as  the  latter 
began  operations.  But  such  was  not  the  case.  For  sev- 
eral years  the  railways  seem  to  have  been  no  more  ex- 
peditious or  reliable  than  the  post-riders,  stages,  and 
post-coaches.  As  late  as  the  year  1835,  or  six  years 
after  the  successful  trial  of  the  "Stourbridge  Lion"  at 
Honesdale,  the  postmaster-general  threatened  to  re- 
move the  mails  from  several  of  the  leading  railways, 
unless  they  were  forwarded  with  greater  expedition 
and  certainty.^ 

This  threat  to  remand  the  mail  contractors  back  to 
the  stages  may  seem  strange  in  view  of  the  records 
made  in  the  two  famous  prize  contests  of  Great  Britain 
and  the  United  States.  As  early  as  October,  -1829,  in 
the  great  Rainhill  competition,  brought  about  by  the 
Liverpool  &  Manchester  Railway,  Stephenson  with  the 
"Rocket"  is  said  to  have  attained  a  speed  of  twenty- 
nine  miles  per  hour.^  This  record  was  soon  equaled  in 
our  own  country.  During  the  summer  of  1831  there 
was  a  contest  just  outside  of  Baltimore  for  the  prize 
offered  by  the  Baltimore  &  Ohio  Railroad.  One  of  the 
contesting  locomotives,  "The  York,"  built  by  Phineas 

^  48th  Cong.,  2d  Sess.,  Senate  Ex.  Doc.  A^o.  40,  pp.  22,  23. 
"  Stretton,  The  Development  of  the  Locomotive,  pp.  30-32. 


RAILWAY  MAIL  SERVICE  59 

Davis,  of  York,  Pa.,  after  undergoing  certain  modi- 
fications, was  found  capable  of  running  a  short  distance 
on  a  straight  and  level  stretch  of  track  at  the  rate  of 
thirty  miles  per  hour.'* 

Too  much,  however,  can  easily  be  inferred  from 
these  records.  In  all  probability  they  are  only  esti- 
mates, and  something  must  be  allowed  for  the  great 
enthusiasm  that  prevailed.  But  in  any  case  they  were 
extraordinary  performances,  and  stand  in  no  higher 
relation  to  what  could  then  be  done,  day  in  and  day 
out,  than  the  wonderful  bursts  of  speed  of  today  stand 
in  relation  to  the  everyday  performances  of  our  en- 
gines. 

The  best  locomotives  now  manufactured  can  attain 
and  hold  a  speed  for  a  short  distance  of  certainly  90, 
and  perhaps  even  no,  miles  per  hour,  but  the  average 
running-speed  of  our  fastest  trains  falls  far  short  of 
even  the  lower  of  these  figures.  The  running-speed  of 
the  fastest  regular  trains  of  the  United  States — and,  it 
might  be  added,  of  the  world — namely,  those  between 
Atlantic  City  and  Camden,  is  66.8  miles  per  hour.  This 
run  is,  of  course,  only  a  dash,  the  distance  by  the  longer 
route  being  but  59  miles,  with  no  stops  between  the 
termini.  The  running-speed  of  the  Empire  State  Ex- 
press on  its  journey  of  440  miles  from  New  York  to 
Buffalo,  deducting  8  minutes  for  the  four  station  stops 
it  makes,  is  54.2  miles  per  hour,  while  the  running- 
speed  of  the  Xorth-Western  and  Burlington  fast  mail 
trains  on  their  long  journey  of  490  miles  from  Chicago 
to  Council  Bluffs,  allowing  35  minutes  for  thirteen 
station  stops,  is  51  miles  per  hour. 

*  The  Great  Railn'ay  Celebrations  of  1857,  P-  22. 


6o  LECTURES  ON  COMMERCE 

It  was  not  until  the  first  railways  had  been  in  opera- 
tion for  several  years  that  the  locomotive  fully  estab- 
lished its  superiority  over  the  horse  in  point  of  speed 
and  reliability.  Shortly  after  the  opening  of  the  first 
section  of  the  Baltimore  &  Ohio  Railway  to  Ellicott's 
Mills,  or  in  the  summer  of  1830,  Peter  Cooper,  run- 
ning the  "Tom  Thumb,"  a  locomotive  of  his  own  con- 
struction, was  distanced  by  a  powerful  gray  horse 
drawing  a  car  which  by  this  victory  became  famous, 
and  later  played  a  conspicuous  role  in  the  public  prints 
and  early  books  on  travel.  Of  course,  Cooper's  discom- 
fiture was  due  to  an  accident,  the  slipping  of  the  belt 
that  operated  the  blower.  This,  however,  only  empha- 
sizes my  point,  namely,  that  the  locomotive  could  not 
yet  be  counted  on  for  regular  performances.  In  this 
contest  Stockton  and  Stokes,  the  owners  of  the  horse, 
undoubtedly  did  their  best,  for  they  were  the  great 
stage-owners  of  that  day,  and  were  determined  not  to 
let  their  mail  contracts  slip  without  a  supreme  effort  to 
retain  them. 

That  the  average  speed  on  the  railways  during  the 
first  decade  of  this  form  of  transportation  was  little,  if 
any,  above  that  made  by  the  post-riders  and  stages  can 
readily  be  shown.  Many  of  the  contracts  for  the  latter 
kind  of  service  called  for  eight,  nine,  ten,  and,  we  have 
seen,  even  as  high  as  fifteen,  miles  per  hour.  The  rail- 
roads scarcely  did  better.  On  March  28,  1835,  the 
Post-Office  Department  complained  that  "the  mail  from 
New  York  to  Philadelphia,  by  railroad,  is  usually  late, 
taking  more  than  thirteen  hours  from  Jersey  City. 
[And  then  added :]  This  was  hardly  the  case  in  the 
worst  of  bad  staging."  ^  On  April  30  of  the  same  year, 

°48th  Cong.,  2d  Sess.,  Seti.  Ex.  Doc.  No.  40,  p.  22. 


RAILWAY  MAIL  SERVICE  6i 

in   another   letter   of   rebuke,    the   postmaster-general 
said : 

There  have  been  two  failures  of  the  mail  from  beyond  Phila- 
delphia, at  this  city,  in  the  course  of  the  present  week,  occasioned, 
it  is  said,  by  accidents  to  the  locomotive  on  the  Amboy  &  Cam- 
den Railroad.  These  occurrences  are  peculiarly  annoying  at  this 
time,  and  have  become  the  subject  of  public  notice  and  com- 
plaint. From  the  experiences  we  have  had,  the  adaptation  of 
the  railroad  to  the  purposes  of  mail  transportation  is  becoming 
every  day  more  and  more  questionable.  It  is  very  apparent  that 
it  cannot  be  relied  on  with  that  degree  of  certainty  which  is  all- 
important  in  the  transmission  of  the  mail,  and  without  which 
disappointments  occur  to  the  public,  and  complaints  are  rung 
in  the  ears  of  the  Department  from  every  quarter  of  the  country.' 

On  November  24,  1837,  it  was  ordered  by  the 
postmaster-general  that  one  Hutchinson  be  offered 
$350  for  the  conveyance  of  the  president's  message,  on 
the  first  Tuesday  in  December,  by  express  mail  from 
Washington  to  New  York.  This  mail  was  to  leave 
Washington  at  noon  and  reach  New  York  at  4  a.  m. 
the  next  day  J  As  the  distance  was  about  230  miles, 
the  average  speed  stipulated  was  a  little  less  than  14^ 
miles  per  hour.  On  December  12,  1838,  the  postmaster- 
general  approved  the  arrangement  of  the  postmaster  at 
Philadelphia  for  carrying  the  president's  message  by 
special  mail  on  the  railroad  from  Philadelphia  to  New 
York  in  five  hours  for  $500.^  In  1833  the  mail  was 
carried  between  these  cities  by  the  post-riders  in  six 
hours.  As  late  as  1839  the  mail  trains  on  the  South 
Carolina  Railroad  averaged  less  than  1 1  miles  per  hour 
in  running  from  Charleston  to  Hamburg,  a  distance 
of  138  miles.  It  will  be  remembered  that  this  was 
the  second  railroad  opened  in  the  United  States  de- 

"  Ibid.,  p.  2Z.  ''Ibid.,  p.  31.  ^  Ibid.,  pp.  31,  32. 


62  LECTURES  ON  COMMERCE 

signed  for  a  general  freight  and  passenger  business, 
and  that  it  began  to  use  the  locomotive  as  early  as 
1830.  And  it  seems  the  postmaster-general  feared  the 
trains  might  have  difficulty  in  making  even  1 1  miles 
per  hour,  for  the  contract  covering  this  route  stipulated 
that  "the  way-mails  are  to  be  handed  in  and  out,  at  the 
way  stations,  without  stopping  the  cars  entirely."  ^ 

While  the  examples  cited  show  the  railroads  were 
but  little  superior  to  the  post-riders  and  stages,  they  by 
no  means  present  the  railroad  service  at  its  worst.  The 
railways  I  have  selected  were  those  first  established, 
and  connecting  the  principal  cities,  and  therefore  prob- 
ably rendering  the  best  service  then  to  be  found. 
Where  the  service  extended  over  several  railways  it 
was  even  slower,  for  railway  connections,  unlike  the 
stage  connections,  were  very  poor  in  those  days.  The 
running  schedules  of  the  different  corporations  seem 
to  have  been  drawn  up  with  the  idea  of  making  the 
breaks  in  travel  as  frequent  and  as  long  as  possible. 
The  traveler  from  Washington  to  New  York,  on  arriv- 
ing at  Baltimore,  would  be  likely  to  find  that  the  train 
for  Philadelphia  had  just  departed,  and  on  arriving  at 
Philadelphia  he  would  be  likely  to  find  that  the  train 
for  New  York  had  just  departed. 

There  was  still  another  reason  why  the  railways  did 
not  at  first  make  much  better  time  than  the  stages.  In 
the  early  days,  and  for  many  years  after  the  railways 
were  established,  the  movement  of  trains  during  the 
night  hours  was  very  limited,  and  on  almost  all  rail- 
roads was  wholly  suspended.  This  placed  the  railroad 
at  a  great  disadvantage,  because  the  bulk  of  the  mail — 
the  morning  papers  did  not  then  count  for  much — accu- 

"Ibid.,  p.  32- 


RAILWAY  MAIL  SERVICE  63 

mulated  in  the  afternoon.  The  stages  and  post-coaches 
would  start  with  it  in  the  early  evening,  and  where  the 
distance  was  not  great,  as,  for  instance,  between  Balti- 
more and  Washington,  the  mail  would  be  at  its  destina- 
tion about  the  time  the  train  started  the  next  morning. 
As  late  as  October,  1841,  some  of  the  railways  involved 
refused  to  adopt  schedules  urged  by  the  postmaster- 
general  which  would  have  very  materially  expedited 
the  mail  between  Boston  and  Charleston,  because  they 
called  for  night  running,  and  would  not  yield,  although 
the  postmaster-general  intimated  Congress  would  in- 
demnify them  for  the  additional  difficulties  and  ex- 
pense incident  to  running  in  the  night-time.^ *^  Shortly 
before  this,  one  railway  offered  to  carry  the  mail  with 
night  service  at  $300  per  mile  per  year,  and  for  $200  if 
the  department  would  so  arrange  the  schedules  that  the 
running  would  fall  entirely  between  sunrise  and  sun- 
set.^ ^ 

The  chief  reasons  have  now  been  presented  showing 
why  the  railways  did  not,  and  could  not,  at  once  offer  a 
mail  service  greatly  superior  to  that  they  found  in  exist- 
ence. During  the  first  decade,  and  even  later,  it  was  a 
contest  between  a  slightly  inferior,  but  well-organized, 
mode  of  conveyance,  which  was  in  complete  possession 
of  the  field,  and  which,  by  long  years  of  service,  had 
become  nicely  adjusted  to  the  work  required,  and  a 
slightly  superior  medium  of  transportation,  but  un- 
organized, disjointed,  with  little  flexibility,  and  as  yet 
wholly  unadjusted  to  the  work  expected  of  it. 

As  I  have  already  stated,  the  inability  of  the  rail- 
ways to  give  a  service  materially  better  than  the  one 

^Ibid.,  p.  41-  ^^Ibid.,  p.  33- 


64  LECTURES  ON  COMMERCE 

already  at  the  disposal  of  the  Post-Office  Department 
explains  why  the  mail  traffic  was  not  more  generally 
transferred  to  them  than  it  was.  In  1842  the  mail  was 
carried  upon  only  3,091  of  the  4,026  miles  of  railway 
then  in  existence.  In  some  few  cases  the  mail  was  not 
transferred  for  other  reasons  than  the  inability  of  the 
railway  to  provide  better  service.  The  postmaster- 
general  reported  that  several  railways  demanded 
greater  compensation  than  he  was  willing  to  allow. 
But,  broadly  speaking,  I  believe  it  can  be  said  that  the 
abandonment  of  the  stages  and  the  more  complete  utili- 
zation of  the  railways  was  due  to  the  fact  that,  when 
all  things  were  considered,  the  railway  service  was  not 
sufficiently  superior  to  the  established  service  to  render 
a  change  desirable.  The  predictions  of  the  wonderful 
speed  with  which  persons  and  intelligence  would  soon 
travel,  made  when  the  first  railways  were  opened,  had 
not  yet  been  realized. 

But,  notwithstanding  the  small  progress  that  was 
made  in  the  first  decade  of  railway  transportation, 
Horatio  Allen  w^as  soon  to  be  justified  in  making  his 
decision,  in  1829,  in  favor  of  the  locomotive  rather  than 
the  horse,  as  the  motive  power  to  be  adopted  by  the 
South  Carolina  Railroad,  then  about  to  be  opened.  He 
took  his  stand,  he  said,  "on  the  broad  ground  that  in 
the  future  there  was  no  reason  to  expect  any  material 
improvement  in  the  breed  of  horses,  while  ....  the 
man  was  not  living  who  knew  what  the  breed  of  loco- 
motives was  to  place  at  command."  ^^  The  stages  and 
post-riders  had  nearly  reached,  if  they  had  not  already 
attained,  the  limit  of  their  accomplishments.     Fifteen 

"  The  American  Railivay,  p.  104. 


RAILWAY  MAIL  SERVICE  65 

miles  an  hour  was  too  fast  a  life  for  even  the  toughest 
horse  to  endure  it  long. 

Although  wonderful  progress  in  railway  transporta- 
tion was  not  made  for  many  years,  enough  was  accom- 
plished, however,  to  justify  abundantly  the  predictions 
made  by  Horatio  Allen  and  his  fellow-pioneers.  The 
discovery  and  utilization  of  the  electric  telegraph ;  the 
substitution  of  T-rails  for  the  light  strap,  bar,  and  edge 
rails  that  had  been  laid  on  many  lines ;  the  heavier  loco- 
motives this  made  possible;  better  bridges;  closer  con- 
nections; the  amalgamation  of  short  antagonistic  bits 
of  railway  into  one  harmonious  line ;  and  the  more  gen- 
eral operation  of  trains  during  the  night  hours — all 
these,  and  other  factors  not  mentioned,  so  increased  the 
effectiveness  of  the  railways  that  the  great  stage  lines 
fell  out  of  the  race.  By  1850  a  few  railways  for  the 
accommodation  of  through  mail  and  passengers  ran 
trains  at  25  miles  per  hour.^^  While  this  would  not 
now  be  looked  upon  as  rapid  running,  it  represented  a 
material  improvement,  and  was  fast  enough  to  win  the 
traffic  for  the  railways.  Not  much  progress  seems  to 
have  been  made  during  the  next  decade,  at  least  not  on 
the  great  eastern  lines.  In  i860  the  postmaster-general 
reported  that  an  experiment  was  made  with  a  night 
mail  between  New  York  and  Boston.  This  was  one  of 
the  earliest  attempts  to  unite  several  distinct  companies, 
deriving  their  charters  from  as  many  different  states, 
into  one  continuous  line.  The  time  between  these  two 
cities  was  reduced  by  this  train  to  nine  hours.^^  The 
distance  being  about  230  miles,  the  average  speed  main- 
tained was  but  little  more  than  25  miles  per  hour.   The 

"48th  Cong.,  2d  Sess.,  Sen.  Ex.  Doc.  No.  40,  p.  50. 
"7Wd.,  p.  58. 


66  LECTURES  ON  COMMERCE 

service  between  New  York  and  Washington  was  not  so 
satisfactory  as  that  between  New  York  and  Boston. 
Twenty  miles  per  hour  seems  to  have  been  all  the  de- 
partment could  secure  from  the  railways  forming  this 
route.  ^^ 

More  than  thirty  years  have  now  passed  since  the 
first  railway  was  opened  for  business.  The  great  stage 
lines,  once  powerful  competitors  for  the  mail  traffic, 
have  ceased  to  exist,  except  in  the  far  West.  And  even 
here  the  great  overland  stages  are  soon  to  be  crowded 
out  by  the  Central  and  Union  Pacific  railways,  now 
rapidly  approaching  each  other.  But,  notwithstanding 
the  fact  that  the  stages  have  long  since  disappeared 
from  the  older  portions  of  the  country,  stage-coach 
methods  of  handling  the  mail  are  still  in  vogue.  To 
utilize  the  new  form  of  transportation  in  anything  like 
full  measure,  a  new  system  of  separation  should  have 
been  introduced.  But  there  was  little  deviation  from 
the  stage-coach  ways.  The  railroads  hauled  the  mail 
practically  as  the  stages  had  hauled  it  before  them. 
But  a  great  departure  was  about  to  be  made.  The 
mails  were  soon  to  be  distributed  in  railway  cars  instead 
of  stationary  post-offices  along  the  route.  The  car  was 
to  become  something  more  than  a  mere  vehicle  of  trans- 
portation. It  was  to  be  the  place  in  which  almost  all 
the  work  of  sorting  and  pouching  was  to  be  done,  and 
thus  it  was  to  become  the  backbone  of  a  new  system  of 
handling  the  mail.  Before  taking  up  the  introduction 
of  the  railway  post-office,  which  is  the  technical  name 
for  a  car  devoted  to  the  distribution  of  mail,  the  system 
the  railway  mail  cars  supplanted  will  be  sketched  in 
barest  outline. 

^^Ibid.,  p.  59. 


RAILWAY  MAIL  SERVICE  67 

The  method  of  handhng  the  mail  in  existence  ante- 
rior to  the  introduction  of  the  railway  post-offices  was 
built  up  about  what  were  known  as  distributing  post- 
offices.  From  the  earliest  days  until  the  introduction 
of  the  railway  post-offices  the  great  problem  which 
constantly  vexed  the  post-office  officials  was  the  sorting 
and  pouching  of  the  mails.  Before  the  mail  can  be 
started  on  its  journey,  it  must  be  pouched.  Now,  obvi- 
ously there  cannot  be  so  many  pouches  as  there  are 
places  for  which  the  mail  is  destined,  because,  among 
other  reasons,  the  weight  of  the  pouches  would  be  so 
many  times  the  weight  of  the  mail  that  the  means  of 
transportation  would  be  broken  down.  In  many  cases 
there  would  be  a  pouch  for  one  letter.  Under  such  a 
system  the  aggregate  gross  revenues  of  the  Post-Office 
Department  for  many  years  would  not  suffice  to  pay 
for  the  pouches.  That  these  statements  are  true  be- 
comes apparent  on  a  moment's  reflection  on  the  final 
destination  of  the  enormous  number  of  pieces  of  mail 
sent  out  every  day  from  the  Chicago  and  New  York 
post-offices. 

In  the  very  early  days  the  problem  of  pouching  the 
mail  was  not  serious.  The  volume  of  mail  was  then  sur- 
prisingly small.  The  mail  generally  went  into  one  pouch. 
The  stage  drew  up  to  the  post-office,  which  was  usually 
also  the  tavern,  and  the  postmaster  went  through 
the  pouch,  and,  after  removing  what  belonged  to  him, 
added  what  mail  he  wished  to  dispatch.  This  could 
generally  be  completed  before  the  horses  were  changed 
and  the  passengers  had  refreshed  themselves,  and  there 
was  thus  no  delay  of  the  mail.  Even  at  the  time  the 
railroads  made  their  appearance  there  was  no  wide- 


68  LECTURES  ON  COMMERCE 

spread  dissatisfaction  with  the  way  the  mail  was  han- 
dled. The  Post-Office  Department,  under  its  contracts, 
regulated  the  arrival  and  departure  of  the  stages,  and 
when  necessary  they  could  be  held  until  the  mail  was 
ready,  and  thus  the  mail  generally  kept  pace  with  the 
passengers.  So  long  as  the  movement  of  the  mail  was 
equal  to  the  most  rapid  transition  of  the  traveler,  there 
was  no  complaint  from  the  public.  There  are  instances 
on  record,  however,  where  the  patience  of  the  travelers 
was  exhausted.  By  making  up  a  purse  sufficient  to  in- 
demnify him  for  the  fine  the  department  imposed,  they 
sometimes  induced  the  driver  to  abandon  the  mail. 

But  long  before  1830,  the  year  of  the  opening  of  the 
Baltimore  &  Ohio  Railroad,  a  single  pouch  ceased  to 
hold  all  the  mail  on  the  heavy  routes,  and  the  simple 
methods  that  once  obtained  had  given  way  to  a  more 
complicated  system.  As  early  as  1810  a  law  was  passed 
authorizing  the  postmaster-general  to  establish  distrib- 
uting post-offices,  and  he  accordingly  designated  thirty- 
five  offices  as  distributing  offices.  So  far  as  I  can  learn, 
these  offices  merely  continued  to  do,  but  on  a  much 
larger  scale,  what  they  had  already  been  doing  for  some 
time  in  a  small  way. 

As  the  tide  of  emigration  spread  over  the  Mississippi 
valley,  and  the  number  of  post-offices  multiplied,  distri- 
bution became  more  and  more  difficult.  Direct  pouch- 
ing, from  each  office  to  every  other  office  for  which 
there  was  any  mail,  became  more  and  more  impossible, 
because  of  the  number  of  pouches  that  would  be  re- 
quired. To  keep  down  the  number  of  bags,  the  mail 
was  now  sent  to  the  distributing  post-offices  from  all 
the  offices  in  the  territory  of  which  this  office  was  the 


RAILWAY  MAIL  SERVICE  69 

center.     Here  the  whole  mass  was  sorted  and  pouched, 
and  then  shipped  to  the  various  distributing  offices  scat- 
tered about  the  country,  each  one  of  which  now  acted 
as  a  distributing  center,  and  made  up  and  forwarded 
the  mail  to  the  smaller  offices  grouped  about  it.     To 
make  all  this  a  little  clearer,  let  us  suppose  the  system 
to  be  still  in  existence,  and  that  Chicago  and  Boston 
are  distributing  post-offices.    If  such  were  the  case,  the 
postmasters  in  the  smaller  cities  around  Chicago  would 
send  any  mail  they  might  have  for  Boston  and  the 
smaller  cities  grouped  about  it  to  Chicago,  where  all 
the  mail  for  Boston,  and  the  territory  of  which  it  was 
the  distributing  center,  would  be  put  in  one  bag  and 
sent  to  Boston,  where  the  bag  would  be  opened,  the 
mail  separated,  and  sent  out  to  the  surrounding  offices. 
From  this  description  of  the  work  done  in  the  distrib- 
uting post-offices  it  is  seen  that  the  name  "distributing 
post-office"  was  inadequate.     It  only  described  one  of 
the  two  functions  of  the  office.    The  initial  massing  of 
the  mail  was  quite  as  important  as  the  later  distribu- 
tion. 

Although  successful  in  keeping  down  the  number  of 
bags  and  pouches  required  in  the  transmission  of  the 
mail,  the  distributing  post-offices  soon  became  intoler- 
able, because  of  the  delays  they  imposed.  In  the  stage- 
coach days,  wdien  the  current  of  life  moved  slowly,  they 
were  in  keeping  with  their  surroundings;  but  in  later 
times,  after  the  railway  communicated  its  quickened 
life  to  almost  everything  about  it,  the  old  order  be- 
came unendurable.  As  I  have  before  stated,  so  long  as 
the  mail  kept  pace  with  the  passenger  there  was  no 
complaint,  but  when  the  traveler  starting  from  the  same 


70  LECTURES  ON  COMMERCE 

place  at  the  same  moment  almost  invariably  reached  a 
common  destination  one  or  two  days  before  a  letter,  the 
patrons  of  the  post-office  began  to  protest.  In  the  illus- 
tration that  was  introduced  a  moment  ago,  the  letter, 
on  reaching  Chicago,  would  be  taken  to  the  post-office, 
and  in  about  ninety-nine  times  out  of  a  hundred  it 
would  lose  its  eastern  connection,  and  very  frequently 
it  would  miss  several  connections;  and  when  finally  it 
did  get  to  Boston  it  would  again  have  to  go  to  the  dis- 
tributing post-office.  The  traveler,  on  reaching  Chi- 
cago, would  in  many  cases  at  once  board  an  east-bound 
train,  and  very  shortly  be  on  his  way.  To  these  long 
breaks  in  the  journey  of  a  letter  the  people  objected. 
Finally  their  protests  became  so  numerous,  loud,  and 
emphatic  that  the  officials  were  forced  to  look  about  for 
a  remedy. 

At  first  the  ax  was  laid  at  the  root  of  the  abuses  that 
had  grown  up  in  and  about  the  distributing  post-offices. 
The  emoluments  derived  by  the  postmasters  at  dis- 
tributing offices  consisted  of  a  commission  on  the  letters 
distributed.  Originally  the  commission  was  5  per  cent, 
on  letter  postage,  paid  and  unpaid.  This  was  after- 
ward increased  by  law  to  7,  and  later  to  12^,  per  cent. 
It  was  thus  obviously  the  interest  of  the  postmasters  of 
these  offices  to  increase  their  distributing  business  to 
the  utmost ;  and,  though  expressly  forbidden  by  the  de- 
partment to  invite  mail  from  its  legitimate  channel,  this 
was  nevertheless  often  done.  Letters  were  frequently 
subjected  to  so  many  distributions  that  the  postage  paid 
on  them  was  entirely  eaten  up.  In  some  cases  the 
commissions  of  the  postmaster  greatly  exceeded  the 
entire  proceeds  of  his  office,  and  a  balance  had  to  be 


RAILWAY  MAIL  SERVICE  71 

paid  him  from  outside  sources.^ *^  In  1851  and  1852 
the  postmaster-general  made  a  strenuous  effort  to  cor- 
rect these  evils  and  abuses.  He  framed  new  regula- 
tions designed  to  cut  off  unnecessary  distribution,  with 
its  train  of  evils,  and  even  went  so  far  as  to  remove 
summarily  several  conspicuous  postmasters  for  violat- 
ing his  instructions.  The  work  begun  by  Postmaster- 
General  Hall  was  carried  on  with  vigor  by  Judge 
Campbell,  who  became  postmaster-general  in  1853. 
He  caused  copies  of  the  distributing  schemes  used  in 
the  distributing  offices,  which  were  then  about  fifty  in 
number,  to  be  sent  to  Washington  for  examination. 
Mr.  Henry  A.  Burr,  the  topographer  of  the  department, 
to  whom  they  were  referred,  found  nearly  all  of  them 
grossly  defective  and  productive  of  unnecessary  dis- 
tribution, with  its  attendant  delays  and  expense.  By 
direction  of  the  postmaster-general,  Mr.  Burr  prepared 
new  schemes,  but  in  submitting  them  he  expressed  the 
opinion  that,  so  long  as  the  mails  were  stopped  in  transit 
for  separation,  no  scheme  of  distribution  could  be  de- 
vised which  would  give  dispatch,  or  prevent  passengers 
and  express  matter  from  outstripping  the  mail.  The 
only  effective  remedy  was  the  abrogation  of  the  dis- 
tributing post-offices  and  the  transfer  of  the  work  of 
separation  to  "over  the  car  wheels,"  as  he  expressed  it. 
But  the  force  of  progress  was  yet  too  feeble  to  take 
this  radical  step.  It  was  not  long,  however,  before  it 
was  found  that,  although  Mr.  Burr's  scheme  corrected 
many  evils,  it  was  inadequate,  long  delays  still  being 
very  frequent.  In  1857  another  step  forward  was 
taken.    In  this  year  the  number  of  cities  to  which  there 

^^  Ibid.,  p.  142. 


72  LECTURES  ON  COMMERCE 

was  direct  mailing  was  greatly  enlarged,  and  on  the 
trunk  lines  the  mails  were  placed  in  charge  of  what 
were  known  as  "express  agents,"  who  went  with  the 
mail  and  saw  that  the  pouches  were  properly  trans- 
ferred at  junction  points.  This  practice  very  largely 
reduced  the  quantity  of  mail  that  had  to  percolate 
through  the  distributing  post-offices,  and,  so  far  as  it 
extended,  prevented  passengers  and  express  matter 
from  making  better  connections  and  thus  outstripping 
the  mail.  Direct  mailing  having  proved  successful,  it 
was  so  far  extended  by  1859  that  thirteen  of  the  fifty 
distributing  offices  were  found  unnecessary,  and  were 
•accordingly  abolished. 

But  even  after  these  reforms  were  made,  a  very 
large  portion  of  the  mail  moved  in  the  old  channels, 
with  all  the  incidental  delays.  Only  the  mail  between 
the  favored  cities  was  accelerated.  The  great  object 
for  which  the  Post-Office  Department  was  now  striv- 
ing still  remained  unrealized,  and  the  department  hesi- 
tated to  make  the  radical  departure  necessary  to  achieve 
it.  The  timidity  and  distrust  of  anything  new  which 
had  so  long  characterized  the  department  could  not  be 
shaken  off  in  a  day.  But  the  first  step  had  been  taken, 
and  the  second  had  to  follow.  The  department  had 
placed  before  itself  the  ideal  of  giving  the  mail  as  great 
expedition  as  the  most  rapid  transition  of  the  traveler. 
This  could  only  be  secured  by  giving  the  mail  at  all 
junction  points  as  close  and  perfect  connections  as  the 
passenger  could  obtain  for  himself.  This  meant  that 
on  the  arrival  at  Chicago  of  a  mail  train  from  St.  Paul 
all  the  mail  must  be  ready  for  immediate  dispatch  to  the 
several  railway  stations  to  catch  the  outgoing  trains, 
even  though  mail  had  been  taken  on  but  a  few  miles  out 


RAILWAY  MAIL  SERVICE  73 

of  Chicago.    If  a  passenger  could  take  an  omnibus  or 
cab  and  catch  a  train,  the  driver  of  the  mail  wagon 
must  get  the  mail  there.     In  such  a  scheme  there  was 
no  place  for  a  distributing  post-office.    The  magnitude 
of  the  work  that  would  have  to  be  done  in  the  cars,  as 
well  it  might,  caused  the  Post-Office  Department  to 
hold  back.    But  a  start  was  to  be  made  very  soon.    A 
condition  had  arisen  in  the  West,  where  neither  railway 
nor  post-office  officials  were  so  completely  under  the 
thraldom  of  old  customs  and  regulations,  which  im- 
peratively demanded  a  change.  In  July,  1861,  the  over- 
land mails  began  to  be  carried  over  the  Hannibal  &  St. 
Joseph  Railroad,^ ^  this  being  the  first  railway  to  reach 
the  Missouri  river.     The  railroad  being  new,  and  the 
demands  upon  it  being  very  heavy,  on  account  of  the 
war  and  the  large  influx  of  settlers,  and  its  operation 
being  difficult  on  account  of  the  guerrilla  warfare  that 
existed,  the  trains  were  always  late.     St.  Joseph  being 
the  most  important  distributing  office  in  the  West,  an 
immense  amount  of  mail  arrived  there  every  morning 
by  the  railway.     The  overland  stages  were  scheduled 
to  leave  three  hours  after  the  train  was  due.    All  of  this 
time  was  required  for  the  distribution  of  the  mail,  so 
when  the  trains  were  late,  the  stages,  which  seem  to 
have  run  with  greater  regularity  than  the  trains,  left 
with  only  a  part  or  without  any  of  the  mail.    An  indefi- 
nite continuance  of  this  state  of  affairs  was  not  viewed 
with  equanimity  by  Mr.  William  A.  Davis,  who  had 
charge  of  the  distribution  of  mail  at  St.  Joseph.     De- 
spite the  fact  that  he  was  a  holdover  from  the  ancien 
regime,  having  been  forty  years  in  the  service,  he  still 
placed  a  very  high  value  on  promptness,  and  set  about 

"Ibid.,  p.  81. 


74  LECTURES  ON  COMMERCE 

to  find  a  way  to  overcome  or  offset  the  lateness  of  the 
trains.  His  remedy  was  to  have  the  overland  mail  all 
ready  for  the  stages  when  the  train  arrived.  If  this 
were  done,  the  mail  would  not  miss  the  stage,  even 
though  the  train  was  full  three  hours  late  and  the  stage 
started  promptly.  To  save  this  three  hours  he  urged 
the  postmaster  at  St.  Joseph,  and  through  him  the  offi- 
cials at  Washington,  to  be  allowed  to  meet  the  mail  on 
its  arrival  at  the  eastern  terminus  of  the  railroad  at 
West  Quincy  and  separate  the  mail  as  the  train  pro- 
ceeded on  its  journey  across  the  state  of  Missouri.  His 
requests  were  granted,  and  he  seems  to  have  lost  no 
time  in  putting  his  plans  into  execution.  On  August  5, 
1862,  he  wrote  the  second  assistant  postmaster-general 
a  brief  account  of  his  experiment.     He  said : 

One  of  the  clerks  and  myself  left  here  on  Saturday,  26th,  so 
as  to  be  in  Quincy  on  Monday,  28th  ultimo,  to  commence  the  dis- 
tribution of  the  overland  mail  on  the  Hannibal  &  Saint  Joseph 
Railroad.  Finding  that  the  mail  cars  had  not  been  arranged 
according  to  promise  made  ....  instead  of  going  to  Quincy 
I  proceeded  to  Hannibal,  and  succeeded  in  getting  cars  tempora- 
rily fixed,  in  which  (though  with  some  inconvenience)  I  think 
the  work  can  be  done  until  the  new  cars  are  ready.  The  distribu- 
tion was  commenced  on  Monday  at  Palmyra,  and  I  assisted  the 
clerk  going  up  as  far  as  Clarence,  at  which  place  I  turned  back 
with  the  clerk  who  had  come  down  to  go  up  on  Tuesday ;  assisted 
up  to  the  same  point  on  Tuesday;  turned  back  and  distributed 
the  mail  going  up  on  Wednesday  myself.  We  have  now  got 
through  with  a  week's  service,  and  can  confidently  report  that 
when  the  accommodations  are  finished  that  are  promised  by 
Mr.  Hayward,  superintendent  of  the  road,  the  distribution  can  be 
done  entirely  to  your  satisfaction." 

^^  Ibid.,  p.  143.  Up  to  this  time,  although  there  had  been  some 
distribution  of  way-mail  in  cars,  no  attempt  had  been  made  to  dis- 
tribute through  mail. 


RAILWAY  MAIL  SERVICE  75 

The  promised  cars  were  soon  completed  and  put  into 
service.  From  this  humble  beginning  the  service  was 
soon  extended,  and,  fortunately,  during  its  formative 
period  the  railway  mail  service  was  in  the  hands  of 
very  able  men.  Limitations  of  time  forbid  stating  who 
they  were  and  what  they  did. 

The  next  important  advance  in  the  railway  mail 
service  was  made  in  1875,  and  the  credit  for  it  belongs 
to  Colonel  George  S.  Bangs,  who  was  then  general 
superintendent.  J\Ir.  Bangs  was  a  man  of  unusual  en- 
erg}%  courage,  and  progressiveness,  and  to  him  more 
than  to  anyone  else  belongs  the  honor  of  thoroughly 
rousing  the  Post-Office  Department  to  its  great  possi- 
bilities. His  administration  was  epoch-making.  It 
marked  the  end  of  the  old  and  the  beginning  of  the  new 
order.  Broadly  speaking,  before  his  time  the  depart- 
ment was  a  non-initiating  body.  Reforms  were  thrust 
upon  it  from  without,  and  only  adopted  when  inaction 
would  no  longer  be  tolerated.  Since  his  administra- 
tion the  department  has  not  only  shown  readiness  to 
adopt  improvements  laid  before  it,  but  has  also  origi- 
nated many. 

Up  to  the  time  ]\Ir.  Bangs  became  general  superin- 
tendent of  the  railway  mail  service  the  officials  of 
the  Post-Office  Department  aimed  no  higher  than  to 
secure  for  the  mail  as  great  expedition  as  passengers 
could  obtain  for  themselves.  Mr.  Bangs  was  not  con- 
tent with  this  program.  He  hoped  to  obtain  greater 
dispatch  for  the  mail.  The  mail  business  had  always 
been  looked  upon  as  an  adjunct  of  the  passenger  busi- 
ness. Mr.  Bangs  hoped  to  secure  exclusive  mail  trains, 
whose  departure  and  arrival  should  be  timed  to  suit  the 


76  LECTURES  ON  COMMERCE 

wants  of  the  Post-Office  Department.  In  1874  he  pre- 
sented his  views  to  Postmaster-General  Jewell,  by 
whom  they  were  favorably  received,  and  he  was  author- 
ized to  open  negotiations  with  the  New  York  Central  & 
Hudson  River  and  the  Lake  Shore  &  Michigan  South- 
ern railroads  for  a  fast  mail  service  between  New  York 
and  Chicago.  For  the  account  of  the  negotiation  which 
follows,  I  am  indebted  to  former  Postmaster-General 
Thomas  L.  James : 

It  was  the  old  story  of  making  bricks  without  straw.  The 
Post-Office  Department  had  no  appropriation  to  pay  for  such 
facihties,  hence  it  had  to  depend  at  first  on  the  pubHc  spirit  of 
the  railroad  authorities.  Commodore  Vanderbilt,  the  president 
of  the  companies  whose  lines  were  to  be  used,  had  had  dealings 
with  the  Department,  and  was  perhaps  not  altogether  san- 
guine as  to  the  practical  issue  of  the  experiment,  or  in  respect  to 
the  countenance  it  would  receive  from  Congress ;  but  Mr.  Wil- 
liam H.  Vanderbilt,  the  vice-president,  lent  a  willing  ear  to  Mr. 
Bangs's  proposition,  and  did  his  utmost  to  aid  him  in  putting  it 
into  effect.  There  being  no  special  appropriation  available  for 
the  purpose  in  hand  ....  Colonel  Bangs  stipulated  that  if  Mr. 
Vanderbilt  would  have  twenty  cars  built  and  the  service  performed, 
all  matter  originating  at,  or  coming  into,  the  New  York  post- 
office,  which  could  reach  its  destination  at  the  same  time  by  this 
line,  should  be  sent  by  this  train,  and  that  the  railway  companies 
could  have  the  right  to  demand  a  weighing  of  the  mail  matter 
at  will,  all  railroads  being  paid  according  to  weight.  When  the 
details  of  the  plan  were  communicated  to  Commodore  Vander- 
bilt, he  is  reported  to  have  said  to  his  son,  "If  you  want  to  do 
this,  go  ahead,  but  I  know  the  Post-Office  Department,  and  you 
will,  too,  within  a  year."  Mr.  Vanderbilt  did  go  ahead !  He 
constructed  and  equipped  the  finest  mail  train  ever  seen,  .... 
ran  it  for  ten  months,  never  missed  a  connection  at  Chicago, 
and  was  always  on  time  at  New  York.  He  did  not  have  to  wait 
a  year,  however,  for  a  realization  of  the  sagacious  old  Commo- 
dore's prophecy.     Within  three  weeks,  despite  the  indignant  pro- 


RAILWAY  MAIL  SERVICE  77 

test  of  Colonel  Bangs,  the  mails  of  three  states  were  ordered  to 
be  taken  from  this  and  given  to  another  route.  A  grosser  and 
more  wanton  breach  of  plighted  faith  it  would  be  hard  to  find, 
and  its  results  were  far-reaching  and  disastrous." 

The  Pennsylvania  Railroad,  not  to  be  outdone  by  its 
rival,  also  established  a  fast  mail  service,  and  thus  there 
was  a  double  service  between  New  York  and  Chicago, 
and  the  outlook  was  bright  for  even  wider  extensions  of 
the  fast  mail  service,  when  Congress,  in  spite  of  the 
efforts  of  the  Post-Office  Department,  passed  an  act 
reducing  by  10  per  cent,  the  already  inadequate  com- 
pensation to  the  trunk  lines  for  carrying  the  mail.  Very 
shortly  after  this  act  was  passed,  the  postmaster-general 
received  a  letter  from  Mr.  W.  H.  Vanderbilt,  which, 
after  reciting  the  conditions  and  circumstances  under 
which  the  fast  mail  was  inaugurated,  closed  as  follows : 
"Congress,  by  its  recent  action  has  expressed  an  unwill- 
ingness to  provide  suitable  compensation  for  the  serv- 
ice, and  I  am  therefore  obliged  to  notify  you  that  the 
fast  mail  train  between  New  York  and  Chicago  will  be 
discontinued  on  the  roads  I  have  the  honor  to  represent, 
after  Saturday,  July  22,  iS^G.^'^o  Mr.  Thomas  A. 
Scott,  on  behalf  of  the  Pennsylvania  Railroad  Co.,  sent 
in  a  similar  communication  on  July  15.^^  The  Post- 
Office  Department  being  unable  to  offer  any  relief,  the 
fast  mail  service,  which  began  so  auspiciously  on  Sep- 
tember 16,  1875,  came  to  an  end  on  July  22,,  1876.^^ 
Colonel  Bangs  was  greatly  disappointed  at  this  abrupt 
undoing  of  all  his  labors,  and  worn  out  by  never-ending 

^^  The  American  Rail'way,  pp.  318-20. 

"48th  Cong.,  2d  Sess.,  Sen.  Ex.  Doc.  No.  40,  p.  184. 


21 


Ibid.,  p.  183.  '^  Ibid.,  p.  103. 


78  LECTURES  ON  COMMERCE 

toil,  and  disheartened  by  the  action  of  Congress,  he 
tendered  his  resignation  and  insisted  on  its  acceptance. 

Though  in  operation  less  than  ten  months,  the  fast 
mail  trains  had  been  in  existence  long  enough  to  estab- 
lish themselves  firmly  in  the  esteem  of  the  business 
world.  They  ran  between  New  York  and  Chicago  in 
twenty-six  hours,  making  connections  at  all  important 
junctions  with  trains  to  and  from  a  vast  territory,  and 
thus  advanced  the  mail  by  twelve,  twenty-four,  and 
even  forty-eight  hours  for  some  sections  of  the  country. 
The  fast  mail  on  the  New  York  Central  and  the  Lake 
Shore  never  missed  a  single  connection,  and  was  late  at 
Chicago  but  three  times,  and  at  New  York  but  once.^^ 

As  may  easily  be  imagined,  the  discontinuance  of 
this  admirable  service  caused  a  great  deal  of  dissatisfac- 
tion and  unfavorable  comment.  In  the  following  year 
an  effort  was  made  in  Congress  to  restore  the  service, 
and  an  appropriation  of  $150,000  was  secured  on 
March  3,  1877.  This  money  was  to  be  paid  for  expe- 
dited service,  and  became  known  as  "special  facility 
pay,"  With  this  appropriation  the  department  was  en- 
abled to  restore  the  fast  mail  trains.  In  1884  several 
more  fast  mail  trains  were  secured  in  other  parts  of  the 
country  without  the  use  of  special  funds,  and  since  the 
latter  year  the  service  has  been  so  widely  extended  that 
there  is  now  scarcely  an  important  mail  route  in  the 
country  that  does  not  have  at  least  one  fast  mail  train 
leaving  at  the  time  and  run  at  such  speed  as  will  best 
meet  the  needs  of  the  Post-Office  Department. 

From  a  place  in  which  there  was  no  separation  of  the 
mail,  the  car  has  become  the  place  in  which  nearly  the 

^^  Ibid.,  p.  103.  There  is  a  slight  error  in  the  statement  of  Mr. 
James, 


RAILWAY  MAIL  SERVICE  79 

whole  of  the  work  of  separation  is  performed.  The 
mail  is  now  sent  from  the  stationary  post-offices  with 
the  least  possible  separation.  Broadly  speaking,  the 
mail  is  now  distributed  for  trains  rather  than  for  cities. 
This  allows  the  mails  to  be  kept  open  at  the  central 
office  until  almost  train  time,  and  it  greatly  economizes 
both  space  and  labor  in  the  central  office.  The  through 
mails,  for  the  most  part,  do  not  even  pass  through  the 
terminal  post-office.  Unless  the  interval  between  their 
arrival  and  departure  is  a  very  long  one,  they  are  trans- 
ferred directly  from  one  station  to  another.  I  have  been 
informed  by  Mr.  E.  L.  West,  one  of  the  division  super- 
intendents of  the  railway  mail  service,  that  not  more 
than  5  per  cent,  of  the  mail  passing  through  Chicago  is 
taken  to  the  central  office,  the  other  95  per  cent,  being 
transferred  directly  from  one  train  to  another. 

Although  the  mail  is  always  received  from  the  city 
post-offices  undistributed,  it  is  never  sent  to  them  from 
the  railway  post-offices  in  this  condition,  if  this  would 
involve  any  delay  in  the  ultimate  delivery  of  the  mail. 
On  the  arrival  in  Chicago  of  the  morning  mail  trains 
the  letter  mail  for  the  business  portion  of  the  city  is 
ready  for  the  carriers,  and  the  letters  for  the  remainder 
of  the  city  are  sorted  and  are  ready  to  go  at  once  to 
their  respective  stations.  The  postmaster-general  re- 
cently said :  "It  is  the  intention  eventually  to  absorb 
all  the  work  of  city  distribution  into  the  Railway  Mail 
Service  whenever  the  mails  can  be  expedited  there- 
by." 24 

The  ideal  railway  mail  service  of  Colonel  Bangs  is 
now  a  reality.    The  mail  on  nearly  every  railroad  in  the 

"Report  of  the  Postmaster-General,  1895,  p.  398. 


8o  LECTURES  ON  COMMERCE 

United  States  is  now  the  favored  traffic.  The  mail 
goes  on  the  fastest  trains ;  the  mail  trains  are  given  the 
right  of  way  over  all  other  trains  ;  the  mail  is  carried  on 
any  train  the  Post-Office  Department  may  select;  no 
mail  is  ever  left  behind,  the  railways  always  furnishing 
sufficient  car  space  regardless  of  the  suddenness  of  the 
demand  that  may  be  made ;  the  mail  cars  are  furnished 
with  the  best  appliances  that  art  and  science  afford;  the 
mail  cars  are  placed  in  the  station  where  they  can  be 
conveniently  approached;  the  railroads  carry  the  mail 
between  their  stations  and  the  post-offices;  and  finally, 
the  railroad  employees  give  the  mail  their  first  attention 
on  arrival  of  trains. 


RAILWAYS  AS  FACTORS  IN  INDUSTRIAL 
DEVELOPMENT. 

LUIS   JACKSON,    INDUSTRIAL    COMMISSIONER,    CHICAGO, 
MILWAUKEE  &  ST.   PAUL  RAILWAY. 

It  will  be  necessary,  in  connection  with  the  subject 
of  this  lecture,  to  remind  ourselves  that  the  year  1830 
witnessed  the  first  operation  of  railways,  in  the  modern 
sense  of  the  term,  on  a  comprehensive  scale  for  the 
carrying  of  passengers  and  freight. 

In  this  year  the  Liverpool  &  Manchester  Railway, 
thirty-one  miles  long,  was  opened  in  the  Old  World 
and  the  Baltimore  &  Ohio,  from  Baltimore  to  Ellicott's 
Mills,  a  distance  of  thirteen  miles,  was  opened  in  the 
New.  It  may  also  be  necessary  to  remember  that  about 
ID  years  prior  to  this,  namely,  in  the  year  18 19,  the 
first  steam  vessel  crossed  the  Atlantic;  while  in  1844 
Professor  Morse  opened  his  telegraph  line  between 
Baltimore  and  Washington — the  first  practical  tele- 
graph system  in  the  world.  The  steamship,  the  rail- 
way, and  the  telegraph  are  the  gifts  of  the  nineteenth 
century.  They  constitute  elements  new  in  the  history 
of  intercommunication. 

The  year  1830,  and  a  few  years  before  and  after, 
therefore,  mark  an  epoch  in  the  career  of  the  human 
race.  From  that  year  civilization  in  its  accepted  sense 
began  to  take  its  stupendous  rise.  I  hold  that  that  year 
marked  the  start  of  real  civilization  and  all  before  it 
can  be  forgiven. 

It  may  also  be  well  to  remember  one  other  date,  and 

81 


82  LECTURES  ON  COMMERCE 

that  is  the  year  1840.  About  this  time  manufacturing 
in  the  wider  sense  of  the  term  began  to  take  a  place  in 
the  United  States.  It  is  very  easy  to  trace  the  begin- 
ning of  manufacturing  in  this  country.  It  started,  of 
course,  in  a  very  small  way  with  the  making  of  some 
of  the  immediate  necessities,  such  as  woolen  goods. 
The  iron-worker  commenced  to  make  a  few  plows. 
Some  one  of  our  forefathers,  who  had  learned  the  tan- 
ning business  in  Europe,  started  to  tan  a  few  hides. 
The  wheelwright  went  in  partnership  with  the  man 
who  could  make  wagon  bodies,  and  so  it  will  readily 
be  seen  that  a  few  woolen  mills,  plow  factories,  tan- 
neries, and  wagon  factories  had  already  made  their 
appearance  before  1830;  but  the  bulk  of  the  manufac- 
tured goods  used  in  this  country  was  sent  over  from 
Europe. 

By  the  year  1835  over  a  thousand  miles  of  railway 
were  in  operation  in  the  country,  and  at  the  close  of 
1900,  200,000  miles,  in  round  numbers,  were  being 
operated  in  the  United  States.  From  1830  to  1901 
is  71  years,  so  that  this  development  of  railways  is 
practically  within  the  span  of  life. 

That  the  railways  have  been  factors  in  industrial 
development  is  a  self-evident  proposition.  It  goes 
without  saying  that  there  must  be  development  where 
there  are  transportation  facilities.  Railways  can  re- 
main passive  and  freight  will,  nevertheless,  come  to 
them,  and  more  or  less  development  will  take  place; 
but  railways  can  also  take  an  active  part  in  develop- 
ment, and  it  is  the  policy  of  most  of  them  to  do  so.  I 
can  best  illustrate  passive  railroading  by  the  following 
incident :     Some  years  ago  a  foreign  government  rail- 


RAILWAYS  AS  FACTORS  IN  DE\'ELOPMENT    83 

road  official  visited  this  country  for  the  purpose  of  in- 
vestigating traffic  matters  on  American  railways.  He 
said  that  the  time  had  arrived  when  the  railroads  of 
his  country,  as  the  American  railways  had  already 
done,  would  have  to  take  cognizance  of  commercial 
conditions.  His  particular  mission  was  to  perfect 
plans  to  meet  the  competition  of  a  new  route  in  an 
adjoining  country.  He  was  given  information  about 
tariffs,  the  system  of  interchanging  freight-cars,  and 
all  that  he  inquired  into.  He  became  very  much  inter- 
ested in  the  interest  taken  by  x\merican  railways  in 
development,  and  requested  an  outline  in  writing  of 
what  had  been  told  him.  He  said  that  in  the  particular 
section  of  country  in  which  he  was  interested  the  rail- 
way had  been  built  as  a  means  of  communication,  and 
the  trains  had  been  run  back  and  forth  day  after  day, 
with  little  active  effort  being  made  toward  industrial 
development.  If  a  man  wanted,  at  his  own  expense, 
a  side-track  to  a  mine  or  to  a  manufacturing  plant, 
months  were  taken  up  with  red  tape  before  giving  a 
"yes"  or  "no"  answer.  About  two  years  after  his 
visit  a  statement  was  published  in  the  official  journal 
of  the  country,  which  practically  amounted  to  an  ad- 
vertisement. It  stated  that  if  any  capitalist  contem- 
plated starting  a  sawmill,  the  chief  government  for- 
ester, on  application,  would  detail  a  deputy  connected 
with  the  particular  district  to  show  what  timber  tracts 
in  the  Crown  Forests  were  available. 

It  has  been  shown  how  factories  such  as  the  woolen 
mill  and  tannery  sprang  into  existence,  and  it  will  have 
to  be  shown  briefly  how  the  railways  gradually  ex- 
tended, in  order  to  get  a  grasp  of  the  subject  as  a 
whole. 


84  LECTURES  ON  COMMERCE 

At  first  the  mileage  of  railways  in  this  country  was 
very  small,  and  they  were  merely  competitors  with  the 
teamster.     And   in   passing   I   will   say  that   railway 
rates,  though  affected  by  a  multitude  of  factors,  have 
their  real  foundation  in  the  price  of  horse  feed.     The 
first  railways  in  the  country  were  ventures  connecting 
one  town  in  the  East  with  another.     It  meant  some- 
thing to  build  railways  in  those  days.     The  public  had 
little  or  no  confidence  in  them,  but  gradually  the  idea 
became  popular  and  railways  began  to  extend  in  sever- 
al directions.    The  men  who  directed  the  affairs  of  the 
roads   unquestionably   foresaw   development,   but   the 
first  thing  in  hand  was  to  understand  the  working  of 
the  new  business  and  the  securing  of  immediate  traffic. 
Soon  came  the  project  of  running  the  rails  to  a  coal 
field  in  order  to  bring  fuel  to  the  large  towns.    Today 
this  looks  like  a  promising  enterprise,  but  in  judging 
of  a  past  event  one  must  see  things  as  they  appeared  at 
the  time  in  question.    There  was  then  an  abundance  of 
timber  near  all  the  larger  towns,  and  cordwood  was 
cheap.     Nevertheless,  the  rails  were  laid  to  the  coal 
mines,  and  still  further  extensions  were  made,  so  that 
by  about  1850  the  several  lines  of  railway  in  operation 
between  New  York  and  Chicago  formed  an  all-rail 
route.     About  1856  lines  were  completed  west  to  the 
Mississippi  river.    In  1867  the  Missouri  river  at  Oma- 
ha was  reached,  and  in  1869  the  railway  was  completed 
across  the  continent.    But,  though  the  railway  spanned 
the  continent,  it  must  be  remembered  that  between  the 
Alleghenies  and  San  Francisco  there  was,  and  is  still, 
plenty  of  open  space. 

Building  railways  in  Europe  from  one  thickly  set- 


RAILWAYS  AS  FACTORS  IN  DEVELOPMENT    85 

tied  district  to  another,  with  abundant  capital  awaiting 
investment,  is  one  thing;  building  lines  in  a  new  coun- 
try, extending  them  50  miles  beyond  the  last  farm, 
and  calling  the  terminus  "End  of  Track,"  is  another. 
One  of  the  first  things  that  the  railways,  and  more 
especially  those  west  of  Chicago,  had  to  do  was  to 
secure  settlers  on  the  lines.  Hundreds  of  thousands  of 
people  now  living  in  the  great  West  are  there  because 
they  or  their  fathers  read  the  enticing  pamphlets  and 
leaflets  published  by  the  railway  companies  telling  all 
about  the  new  opportunities  for  farming.  Great  exer- 
tions were  made  throughout  the  eastern  states  to  secure 
settlers  for  the  West.  Some  railways  even  made  ef- 
forts to  secure  farmers  from  the  British  Isles,  Ger- 
many, and  Scandinavia.  The  railways  have  now 
largely  abandoned  making  efforts  to  secure  settlers 
from  Europe;  in  fact,  the  governments  of  Germany 
and  Austria  place  obstacles  in  the  way  of  disseminating 
emigration  literature.  But  the  western  country  is  still 
sparsely  populated,  and  the  work  of  securing  settlers 
from  the  more  populous  eastern  states  has  to  go  on. 
On  some  railways  a  regular  immigration  bureau  is 
established,  with  an  official  in  charge,  usually  called  the 
"General  Immigration  Agent,"  who  co-operates  with 
land  companies,  land  agents,  and  communities  requir- 
ing more  settlers.  Many  an  eastern  man  who  was  in- 
duced to  come  West  by  reading  the  railway  companies' 
literature  about  government  land,  and  who  might  have 
spent  his  life  vegetating  in  the  East,  now  owns  a  fine 
western  farm,  has  become  rich,  and  has  lived  to  damn 
the  railways  that  were  the  means  of  bringing  him  out. 
The  growth  of  Chicago,  the  settlement  and  prosperity 


86  LECTURES  ON  COMMERCE 

of  the  western  states,  and  the  reflex  of  this  western  de- 
velopment on  the  prosperity  of  the  East  all  attest  the 
efficient  labor  performed  by  the  railways  in  helping  to 
get  the  country  settled.  The  railways  do  all  this  from 
motives  of  self-interest,  but  where  a  great  enterprise 
is  well  directed  the  commonwealth  is  benefited.  Mil- 
lions of  acres  still  await  settlement,  and  this  work  must 
go  on.  The  fact  that  it  was  ever  undertaken  on  so 
extensive  a  scale  by  the  railways  will  in  course  of 
time  be  forgotten,  but  the  result  is  permanent.  All  this 
is  intended  to  emphasize  the  fact  that,  in  order  to  se- 
cure a  general  development  of  industries,  density  of 
population  is  requisite.  It  does  not  mean  that  exces- 
sive density  is  required,  but  there  must  be  a  fair  popu- 
lation. In  this  connection  it  may  be  noted  in  passing 
that  history  shows  that  anti-railroad  legislation  is  gen- 
erally identified  with  states  that  are  sparsely  populated. 
Agriculture  is  of  course  the  basis  of  the  country's 
wealth.  The  territory  west  of  Chicago  is  now  recog- 
nized as  one  of  the  principal  granaries  of  the  world. 
This  has  been  made  possible  only  by  the  extension  of 
the  railways.  A  bushel  of  wheat  is  now  carried  by 
rail  a  distance  of  nearly  two  thousand  miles  for  27 
cents.  To  haul  this  distance  by  wagon  would  cost 
$5.25  per  bushel.  The  price  of  wheat  in  New  York 
is  today  about  80  cents  per  bushel.  In  the  early  days 
of  railroads,  especially  those  west  from  Chicago,  wheat 
and  corn  were  the  principal  staples  carried.  If  the  har- 
vest was  good  things  went  well;  but  if  the  farmers  had 
a  poor  wheat  or  a  poor  corn  crop  it  affected  the  rail- 
ways severely.  It  affects  them  yet,  but  if  there  is 
diversified   farming  the   farmer  more  easily  recovers 


RAILWAYS  AS  FACTORS  IN  DEVELOPMENT    87 

from  the  effects  of  a  bad  year,  and  if  the  railway  has 
diversified  farming,  mines,  quarries,  and  factories  on 
its  Hnes  it  also  gets  over  a  bad  year  more  easily.  The 
railway  managers,  therefore,  saw  that  they  must  not 
be  entirely  dependent  on  one  crop,  and  took  steps  to 
bring  about  a  change  in  conditions. 

We  have  to  understand  that  the  railroads  always 
did  welcome  factories  that  came  to  them.  But  in  this 
new  policy  they  did  not  wait  to  welcome  them,  but 
went  after  the  business.  The  railroads  said:  "We 
must  run  our  business  just  as  every  other  manufac- 
turer does — send  out  travelers  to  sell  goods ;  advertise ; 
tell  what  there  is  on  the  land ;  bring  the  water-powers 
into  use;  bring  the  coal  into  use;  get  brickyards  to 
come."  Then  they  thought :  "What  is  the  best  thing 
to  do  ?"  The  freight  department  might  take  it  in  hand, 
or  the  passenger  department;  but  at  last  someone 
hit  upon  the  idea  that  it  would  be  better  to  put  one  man 
at  the  work,  to  organize  it  so  as  to  bring  about  results. 
In  other  words,  they  were  in  the  same  condition  as  the 
manufacturer  or  business  man  is  today.  You  know  it 
is  one  thing  to  make  goods  and  another  to  manufacture 
a  market  for  them.  That  is  the  theory  of  modern  busi- 
ness, and  you  will  all  have  to  remember  it — you  will 
use  it  in  your  own  vocation,  whatever  it  may  be:  to 
make  goods,  and  to  manufacture  a  market  to  sell  them. 
We  can  illustrate  it  today :  See  all  the  American  nov- 
els that  are  being  sold.  Now,  the  publishers  do  not 
wait  until  the  critics  say  it  is  a  good  thing.  They  get 
right  out  and  advertise;  and  they  have  immense  sales, 
sales  by  the  ton ;  they  have  themselves  made  the  mar- 
ket.    Mr.  Carnegie  is  doing  in  the  steel  business  the 


88  LECTURES  ON  COMMERCE 

same  thing  the  publishers  are  doing  with  the  novels. 
It  is  the  way  every  business  is  being  built  up.  It  is 
called  in  the  political  economies,  in  very  nice  language, 
"to  create  a  demand."  "Manufacturing  a  market"  is 
a  little  more  slangy,  but  it  carries  farther. 

I  will  illustrate  how  we  are  supposed  to  establish 
this  department.  The  first  thing  was  its  organiza- 
tion. You  take  any  railroad  starting  west  from  Chi- 
cago as  it  was  some  ten  or  fifteen  years  ago.  At  that 
time  there  was  Chicago,  and  Chicago  always  had  the 
soil  and  could  grow ;  but  beyond  that  toward  the  Mis- 
sissippi there  was  very  little  development.  The  first 
thing  was  to  take  this  territory  in  hand.  My  instruc- 
tions were  (just  to  show  you  how  practically  they  did 
it)  :  "Jackson,  you  jump  on  the  train  and  look  out  of 
the  window  for  about  six  months;  study  the  country, 
and  study  our  whole  territory."  I  asked :  "When  do 
you  expect  results  ?"  They  replied :  "In  about  three 
years."  "All  right,"  I  said,  "you  have  the  right  idea." 
Of  course  I  did  not  merely  look  out  of  the  window,  but 
I  commenced  to  pay  attention  to  the  business.  The 
first  thing  was  to  get  around  to  all  these  towns  and 
get  them  to  organize  business-men's  associations. 
There  used  to  be  in  most  towns  a  business-men's  asso- 
ciation. They  generally  had  a  billiard-room,  and 
played  a  little  whist,  and  such  things,  but  I  said  :  "Gen- 
tlemen, we  have  got  to  get  right  down  to  business,  and 
do  what  your  name  says.  You  must  form  a  committee 
among  yourselves.  One  man  must  find  out  all  about  the 
mineral  resources  around  your  town,  and  one  man  must 
find  about  the  timber,  and  you  must  post  yourselves 
as  to  what  you  have.    We  want  to  get  all  this  informa- 


RAILWAYS  AS  FACTORS  IN  DEVELOPMENT    89 

tion  collected.  You  know  if  you  go  anywhere  from 
here  to  the  ^Mississippi  and  pass  the  DesPlaines  river, 
and  ask  the  boy  who  lives  there,  "What  river  is  this?" 
he  will  answer,  "I  don't  know."  It  is  somewhat  better 
now,  but  at  that  time  most  of  the  people  around  their 
own  towns  in  the  country  did  not  know.  We  had  to 
tell  them  what  their  resources  were  in  the  first  place. 
But  at  last  we  organized  it.  I  do  not  know  how  many 
towns  there  are,  but  there  are  twelve  hundred  on  the 
line  I  am  with.  We  will  suppose  there  are  5,000  or 
6,000  towns  on  all  these  great  railways,  like  the  North- 
western, the  St.  Paul,  the  Burlington.  You  can  go 
today  to  any  of  these  towns  and  say  to  some  of  the 
business  men,  "I  want  to  start  a  canned-lobster  fac- 
tory;" and  they  will  say:  "Xo;  you  cannot  afford  to 
bring  the  lobsters  to  the  West  to  can  them."  But  the 
next  man  says:  "Mine  is  an  excelsior  factory."  "All 
right ;  you  are  the  man  we  want.  We  have  cottonwood 
around  here  in  plenty,  and  this  is  the  place  to  locate 
your  excelsior  factory."  As  I  said  today,  you  can 
press  the  button  and  in  most  cases  there  is  someone 
in  every  town  who  will  tell  you  the  resources,  whether 
you  can  compete,  and  whether  you  can  get  a  free  site, 
and  what  you  can  do. 

The  first  man  I  took  out  West,  while  working  for 
another  railway,  happened  to  be  an  excelsior-factory 
man.  In  response  to  his  inquiries  at  one  town  he  was 
told :  "Yes,  sir ;  we  could  locate  you  here ;  but  you 
go  two  blocks  down  the  street  and  you  will  meet  Mr. 
Brown.  He  is  well  posted  on  the  locality."  So  we 
walked  tw^o  blocks  and  found  ^Iv.  Brown :  "That  will 
be  the  very  thing  for  this  town;  you  go  a  little  over 


90  LECTURES  ON  COMMERCE 

two  blocks  there  to  ]Mr.  Wells."  When  we  reached 
Mr.  Wells,  the  manufacturer  said :  "This  looks  like 
another  two-blocks  man,  Jackson.  When  is  your  next 
train  out  of  this  town?"  We  had  to  go  out  of  the 
town  because  the  men  would  not  be  bothered.  But 
today  men  understand  the  value  of  an  industry  to  the 
town,  and  endeavor  to  locate  it.  So  the  West  we  have, 
as  it  were,  well  organized. 

Then  we  took  good  care,  of  course,  to  make  our 
work  known  through  the  press.  One  of  the  first  big 
notices  was  in  the  Sioux  City  Journal.  They  said  it 
was  something  like  the  work  of  the  minister  of  com- 
merce of  some  country  like  France  or  Germany,  and 
that  we  ought  to  have  one  here,  and  that  the  govern- 
ment ought  to  do  for  the  whole  countrj^  what  this  rail- 
road was  doing  for  the  West ;  have  the  resources  all 
listed,  so  that  people  could  get  information. 

After  we  thoroughly  organized  the  West,  there 
■was  the  advertising  in  the  East.  Everything  we  said 
was  taken  with  90  per  cent,  discount.  The  great  center 
of  manufacturing  was  around  the  Alleghenies.  They 
had  no  idea  that  you  could  manufacture  things  in  the 
West.  But  we  had  two  or  three  leaders  that  we  always 
would  introduce.  We  said,  for  instance:  "We  can 
make  steel  rails  in  Chicago."  That  is  a  good  argu- 
ment, because  it  implies  that  coal  and  labor  and  iron 
and  limestone  and  everything  needed  is  there.  We 
took  care  to  use  a  few  good  leading  arguments.  The 
first  thing  we  did  was  for  years  to  advertise  in  the 
East  just  one  plain  statement — that  the  people  were 
moving  westward;  that  the  lands  in  the  West  were 
being  settled;  that  great  markets  were  being  formed 


RAILWAYS  AS  FACTORS  IN  DEVELOPMENT    91 

there,  with  great  purchasing  power;  that  the  people 
were  people  of  enterprise  and  would  buy  goods;  that 
the  eastern  man  should  go  West.  We  kept  that  up. 
One  railroad  kept  that  notice  in  its  time-table,  and 
issued  forty  thousand  a  month,  with  a  copy  of  that 
argument,  for  eight  years;  and  somebody  must  have 
read  it.  Of  one  circular  alone  four  millions  were  cir- 
culated in  the  East.  You  can  see  the  effect.  All  the 
agricultural-implement  men  were  in  IMassillon  and 
around  there,  except  the  two  here,  AlcCormick  and 
Deering,  and  a  few  others.  The  people  at  Pittsburg 
had  to  sell  their  implements  at  a  Chicago  rate.  So  at 
last  they  began  to  say :  "What  is  the  use  of  being  so 
far  away  from  the  market  ?  The  market  is  West ;  that 
is  where  they  are  growing  wheat."  So  some  of  the 
agricultural-implement  men  commenced  to  move.  They 
were  about  the  first  that  commenced  to  go  West. 

The  first  thing  we  happened  to  see  in  looking  out 
of  the  windows  was  that  there  is  flax  in  the  West. 
About  three  hundred  thousand  tons  of  flax  straw  were 
burned  up.  You  know  there  was  an  idea  that,  because 
flax  fiber  is  used  for  making  linen,  we  could  do  what 
they  do  in  Europe,  and  people  tried  to  raise  flax  for 
paper  pulp  and  linen.  After  a  good  many  years  we 
discovered  that  if  you  grow  the  flax  for  fiber  you  can- 
not grow  it  for  seed,  and  our  people  in  the  West  can 
only  afford  to  grow  it  for  seed  at  present.  Sometime 
someone  will  discover  how  to  utilize  this  western  flax. 
I  only  mention  this  because  it  shows  how,  when  a  rail- 
road takes  hold  of  an  industry,  one  thing  leads  to  an- 
other. A  man  was  experimenting  in  New  York  with 
this  flax.    He  had  made  a  great  deal  of  money  in  the 


92  LECTURES  ON  COMMERCE 

South,  and  had  a  beautiful  laboratory  in  New  York. 
I  wrote  to  him,  "Why  don't  you  come  out  West  and 
see  the  place,  or  send  a  man."  But  ever}^  time  it 
would  not  work;  he  would  not  come,  and  I  had  lots 
of  correspondence  with  him.  One  day  I  telegraphed, 
"I  am  leaving  on  a  tour  through  the  flax  country,  and 
would  be  glad  if  you  would  send  a  representative." 
That  seemed  to  do  it.  He  wired  me  that  they  would 
come  on  the  next  train.  We  took  them  all  around,  and 
he  started  a  plant  up  in  ]\Iinnesota  to  make  this  paper. 
But  after  trying  it  for  a  year,  in  1892,  they  could  not 
make  it  go.  He  had  spent  $60,000,  without  success, 
and  the  World's  Fair  was  coming  on,  so  he  turned  the 
whole  plant  into  a  furniture-tow  factory,  and  in  1893 
they  made  $20,000  or  $30,000  out  of  furniture  tow, 
and  they  are  making  tow  yet.  That  man  came  to  me 
again  a  few  years  later,  and  said  he  had  to  abandon 
that  flax  business,  but  thought  he  could  make  mats 
from  slough-grass.  I  took  him  all  over  the  West  to 
try  to  find  that  slough-grass,  and  he  had  his  agents 
hunt  for  it,  and  I  suppose  they  must  have  traveled  a 
hundred  thousand  miles.  They  found  it  at  a  place  near 
St.  Paul  and  at  one  near  Oshkosh,  and  at  Oshkosh  they 
have  employed  four  hundred  people  for  the  last  four 
years,  and  the  same  number  at  St.  Paul,  and  they  are 
opening  another  plant  now  in  the  North.  So  it  shows 
how  one  thing  leads  to  another.  I  saw  the  other  day 
in  the  newspaper  that  the  securities  of  the  company 
have  been  listed  on  the  New  York  Stock  Exchange, 
so  I  presume  it  is  a  success. 

Another  time  I  happened  to  go  into  the  office  of  a 
man  who  said :    "Why  don't  you  get  some  brickyards 


RAILWAYS  AS  FACTORS  IN  DEVELOPMENT    93 

on  your  road?"  I  said,  "We  have  some."  "None  near 
Chicago.  A  man  cannot  do  anything  with  these  west- 
ern roads,  but  with  the  roads  that  run  into  Chicago 
from  the  East.  The  western  roads  don't  seem  to  have 
anything."  "Well,"  I  thought,  "we  must  look  into 
that."  The  main  idea  of  a  brickyard  is  this  :  that  people 
will  not  build  a  brick  house  in  the  West,  or  they  would 
not,  unless  the  brick  was  within  easy  reach.  Similar 
conditions  prevailed  in  regard  to  sewer-pipe.  At  that 
time  there  were  a  few  sewer-pipe  factories  at  Akron, 
and  nothing  farther  West,  and  by  the  time  the  pipe 
got  to  Chicago  that  was  about  all  the  freight  it  would 
stand.  You  can  understand  that  there  must  be  a  limit 
to  carrying  cheap  material.  The  people  west  of  the 
Mississippi  could  hardly  get  sewer-pipe  at  all,  except 
at  great  prices,  because  even  the  railroads  could  not 
make  rates  low  enough  on  it.  So  as  soon  as  brick  was 
in  the  vicinity,  when  the  old  frame  houses  commenced 
to  go,  they  commenced  to  build  with  brick,  and  build 
more  substantially.  At  almost  the  same  time  a  man 
on  the  South  Side  came  in  to  us  and  said :  "I  want  to 
make  a  sort  of  conduit-pipe.  We  must  put  the  tele- 
phones underground,  and  I  want  to  find  out  from  you 
where  we  can  get  a  deposit  of  suitable  clay."  "I  do 
not  think  you  can  get  it  near  Chicago,  because 
that  vitrified  clay  does  not  exist  there;  but  we  will 
try."  So  I  wrote  127  agents  within  a  hundred  miles 
from  Chicago :  "Have  you  got  anything  in  the  shape 
of  vitrified  clay,  or  any  good  clay  that  will  make  brick  ? 
If  you  are  too  busy,  please  hand  this  to  someone  inter- 
ested." 

I  do  not  want  to  bore  you  with  these  details,  but  I 


94  LECTURES  ON  COMMERCE 

will  just  illustrate  how  the  whole  thing  is  conducted, 
and  how  it  grew  from  this.  These  agents  got  the  let- 
ters. Eighty  of  them  answered  within  a  week — they 
had  or  had  not.  Some  six  answered  in  fourteen  days, 
and  about  ten  laggards  answered  in  about  three 
months.  That  happens  when  a  man  is  dealing  with 
large  bodies  of  men.  People  say :  "That  man  got 
ahead  through  pull,"  and  so  on.  It  isn't  so;  a  good 
man  does  get  along.  But  I  am  not  going  to  sidetrack 
the  audience  on  that  question.  Three  of  the  agents 
answered  by  telegraph,  "We  have  blue  clay."  I  thought 
there  was  not  much  chance  of  it  suiting,  but  that  it 
was  worth  while  to  investigate  these  three  cases.  So 
I  invited  the  manufacturer  to  come  and  look  at  the 
clay.  I  thought,  "We  might  as  well  spread  this  thing," 
and  I  picked  up  the  Chicago  Directory  and  saw  that 
there  were  89  brick  manufacturers  in  the  town.  I 
wrote  them  all  a  nice  circular  letter:  "Blue  clay  has 
been  discovered  on  the  St.  Paul  road.  We  intend  to 
run  a  special  train  next  Wednesday  at  10  o'clock;  can 
you  send  a  representative,  or  come  yourself?  If  so, 
I  will  send  a  ticket."  I  did  not  want  five  thousand 
free  riders;  I  wanted  the  brick  men  there.  I  received 
sixty-one  answers;  thirty-one  acceptances,  the  others 
giving  reasons  why  they  could  not  come.  Some  argued 
that  there  was  no  use  in  putting  brickyards  out  of 
Chicago.  I  notified  the  station  agents  to  have  those 
farmers  dig  holes  to  show  the  clay.  I  knew  these 
farmers.  I  wrote  them:  "The  train  will  arrive  at 
10:  15  and  will  leave  your  station  at  10:20,  and  if 
the  hole  is  not  dug  we  will  pass  on  to  the  next  station." 
We  came  to  these  stations,  and  the  first  was  very 


RAILWAYS  AS  FACTORS  IN  DEVELOPMENT    95 

good.  At  least  I  suspected  it  was  good,  because  one 
man  lifted  the  clay  twenty  times,  and  showed  it  to  his 
man,  and  said:  "It  isn't  much  good;  I  don't  suppose 
they  will  give  us  a  good  freight-rate  here."  I  said  to 
myself:  "That  fellow  is  kicking;  he  may  buy  the 
goods."  The  man  who  wanted  the  conduit-pipe  said : 
"You  can  drop  this  survey ;  there  is  nothing  to  it ;  but 
you  may  be  able  to  deal  with  these  people."  I  had  also 
three  newspaper  correspondents  with  me,  and  I 
thought,  "We  had  better  get  some  advertising  of  these 
clay  resources,  so  that  more  people  will  come  to  know 
it."  But  that  one  old  fellow  I  hung  onto  as  I  got  onto 
the  train.  He  said :  "Oh,  it's  no  good ;  besides,  you 
wouldn't  make  a  freight  rate."  I  said :  "Well,  what 
sort  of  a  yard  would  you  put  there?"  "Ten  cars  ca- 
pacity a  day." 

The  end  of  it  was,  we  got  that  man  to  put  a  yard 
there,  and  it  is  running  yet.  About  a  month  afterward 
W.  J.  Alsip,  a  well-known  brick  man  of  Chicago  who 
died  the  other  day,  said :  "One  of  my  competitors  has 
gone  up  on  your  road.  I  think  I  will  put  up  a  plant 
there."  You  have  no  trouble  to  catch  the  second  man. 
He  sent  a  man  up  there  for  a  week,  and  the  man  found 
a  place  just  above  this  other  yard,  and  they  have  put 
up  a  yard  that  has  always  given  ten  to  twelve  cars  a 
day.  These  men  shipped  the  brick  to  all  the  little  towns 
around — Janesville,  Rockford,  etc. — and  that  has  led 
again  to  other  little  developments.  1  don't  know  that  I 
should  take  the  time,  but  I  want  to  tell  you  about  that 
Alsip  brickyard.  After  that  man  had  started  that 
brickyard,  he  treated  the  railroad  very  liberally.  In 
every  way  I  could  see  I  was  dealing  with  a  man  who 


96  LECTURES  ON  COMMERCE 

understood  business.  He  said :  "I  want  a  side-track ; 
but  I  don't  ask  you  to  build  a  railroad  through  my  yard, 
but  alongside,  as  far  as  you  think  it  is  proper.  The 
rate  now  is  three  cents.  You  can  charge  me  ten  cents, 
if  a  competitor  pays  ten.  But  I  don't  want  to  pay 
any  more  than  anybody  else."  He  said  :  "I  want  you 
to  live;  I  w^ant  you  to  make  money.  I  don't  want  you 
to  make  a  fortune.''  But  he  showed  me  that  he  was  a 
liberal-minded  man. 

The  next  year  the  strike  was  on.  That  man  came 
to  me  and  said :  "We  are  in  a  very  bad  strait,  Mr. 
Jackson.  I  have  started  my  large  kiln,  and  the  brick  are 
burning,  but  I  am  short  one  hundred  tons  of  coal ;  and 
if  the  fire  goes  out  the  brick  are  of  no  use,  and  we  will 
be  out  thousands  of  dollars.  I  can't  get  a  pound  of 
coal  in  Chicago ;  the  strike  is  on.  I  want  your  railroad 
to  help  me  out  with  five  cars."  I  said :  "I  don't  know 
how  we  can  get  the  cars,  nor  whether  we  can  move 
them."  But  I  went  to  the  fuel  agent  and  told  him.  He 
said :  "I  don't  want  anybody  to  know  that  we  have 
coal,  but  I  have  about  three  or  four  hundred  cars  in  the 
yards,  anticipating  a  strike." 

I  went  to  the  general  manager  and  explained  the 
case.  He  said :  "He  can  have  the  coal,  providing  the 
fuel  agent  will  give  the  coal."  I  said  :  "I  have  seen  the 
fuel  agent."  (This  also  serves  as  an  illustration :  When 
we  go  to  the  general  manager  and  see  he  is  crowded 
with  business,  we  must  help  him  out.)  "I  have  seen 
the  fuel  agent,  and  he  will  give  the  coal."  He  rang 
the  bell :  "John,  go  up  and  tell  Mr.  L.  to  give  him  the 
five  cars  of  coal."  Mr.  Debs  had  given  orders  that 
nobody  should  move  any  trains  out  of  Chicago,  but 


RAILWAYS  AS  FACTORS  IN  DEVELOPMENT    97 

we  managed  it,  and  the  next  morning  at  7  o'clock  we 
ran  them  out  with  office  help,  and  he  saved  his  kiln, 
and  was  the  only  man  in  Chicago  who  had  brick  just 
after  the  strike.  He  completed  a  North  Side  contract, 
and  got  $9  a  thousand. 

The  next  thing  we  had  to  do  was  to  get  our  timber 
known.  Of  course  everybody  knows  that  pine  will 
sell,  but  there  were  a  number  of  things,  like  hemlock, 
which  about  ten  or  fifteen  years  ago  had  no  market  in 
the  West.  This  will  illustrate  how  we  developed  the 
hemlock  and  the  tanneries.  The  tanneries  at  that  time 
were  mostly  in  the  East,  though  there  had  always  been 
a  few  around  Milwaukee.  We  could  not  get  northern 
Wisconsin  settled  at  all.  The  immigration  agent  said : 
"We  cannot  get  any  settlers,  because  we  have  no  mar- 
ket for  the  timber  they  are  clearing  off."  We  went  into 
that  district  and  examined  it,  and  took  some  woodsmen 
along  with  us,  and  made  a  report  as  to  how  much  hem- 
lock there  was.  We  found  there  w^as  enough  hemlock 
there  to  run  all  the  tanneries  in  the  United  States  for 
fifty  years,  and  we  thought  we  would  have  to  get  the 
tanneries  in  the  East  to  come  West. 

The  next  thing  to  do  was  to  advertise  it — to  make 
it  known.  In  Pennsylvania  I  heard  the  bark  was  go- 
ing out,  and  would  not  last  more  than  five  or  six  years. 
That  was  fifteen  years  ago,  and  they  have  lots  of  bark 
yet.  But  on  that  idea  I  made  this  investigation,  and 
had  all  the  data  about  how  much  hemlock  there  was 
in  Wisconsin.  Then  I  got  into  the  hotel  at  Warsaw, 
and  thought:  "Now,  how  can  I  make  this  known 
through  the  East?  If  I  could  get  hold  of  the  cor- 
respondent of  the  Milwaukee  Sentinel,  and  get  him  to 


98  LECTURES  ON  COMMERCE 

put  it  as  an  independent  report,  it  would  be  very  good. 
So  I  thought  I  would  go  and  find  him.  Then  I  saw 
him,  sitting  in  the  ink-bottle.     I  sat  down  and  wrote : 

"Special  from  Warsaw :  There  has  been  an  investi- 
gation made  of  the  hemlock,"  etc.  I  wrote  the  whole 
story :  "Your  correspondent  saw  Mr.  So-and-So,  and 
he  reports  so  and  so,  and  Mr.  So-and-So,  and  he  con- 
firms so  and  so."  And  I  want  to  say,  it  is  good  to  be 
able  to  write  a  little  article.  That  is  to  say,  the  essen- 
tial part.  If  you  have  discovered  how  to  make  hard- 
boiled  eggs,  in  that  particular  paragraph  where  you 
say,  "Take  three  paving  stones,  mix  them  with  turpen- 
tine, and  the  result  is  hard-boiled  eggs,"  you  want  to 
be  able  to  write  that  part  yourself;  you  can  rely  on  the 
reporter  to  put  in  the  parsley  and  the  other  things  that 
are  served  with  eggs. 

I  got  this  article  written,  and  mailed  it  to  the  paper, 
with  compliments.  The  man  at  the  other  end  was  a 
smart  fellow.  He  was  working  for  the  newspaper,  as 
I  was  working  for  the  railroad,  but  he  saw  that  if 
we  could  get  these  tanners  from  Pennsylvania  into 
Wisconsin  they  would  sell  more  newspapers  and  get 
more  advertising.  So  he  takes  this  article  and  puts  in 
big  scare-head  lines:  "Wisconsin  the  Coming  Place 
for  Tanneries!  Pennsylvania  Tan-Bark  Going  Out!" 
Then  my  report. 

When  I  came  to  Chicago  and  took  up  the  Evening 
Post,  there  was  an  editorial  about  Wisconsin  going  to 
be  the  tan-bark  country.  I  said:  "They  must  have 
published  that  article  of  mine."  I  got  a  copy  of  the 
Sentinel.  They  had  it  all  in,  and  some  fellow  in  Mil- 
waukee was  correspondent  for  a  Philadelphia  paper, 


RAILWAYS  AS  FACTORS  IN  DEVELOPMENT    99 

and  he  thought  he  could  make  five  or  ten  dollars,  so 
he  telegraphed  that  through  the  Press  Association,  and 
it  went  all  over  Pennsylvania.  A  week  afterward  I 
received  a  letter  from  a  friend  of  mine,  and  he  said: 
"The  St.  Paul  road  seems  to  be  making  a  great  spread 
of  its  tan-bark."  "Yes,  you  idiot,"  I  said;  "but  why 
didn't  you  send  me  a  copy  of  the  paper?"  A  man 
wants  to  see  how  far  the  children  of  his  brain  have  trav- 
eled, and  what  they  looked  like  when  they  got  into  the 
East.  Don't  tell  a  man,  "I  see  by  the  paper,"  but  "I 
send  you  the  article." 

However,  I  wanted  to  know  whether  it  was  neces- 
sary to  advertise  any  more  about  that.  But  in  a  few 
days  I  got  a  letter  from  a  big  Philadelphia  tanner,  in- 
closing a  copy  of  the  article  from  the  Philadelphia 
Ledger.  The  long  and  short  of  it  was  that  the  first 
man  came  from  Boston  and  thought  he  would  look  at 
the  bark.  He  had  two  cars  of  bark  shipped  east,  sam- 
pled it,  said  it  was  all  right,  came  back  and  established 
a  big  tannery  at  ]\Ierrill. 

I  was  looking  over  a  copy  of  the  circular  which  we 
afterward  printed,  with  that  extract  from  the  news- 
paper. That  circular  says:  "The  bark  on  this  line 
commences  at  Warsaw,  goes  to  Merrill,  and  thence  to 
Tomahawk."  To  end  this  story,  today  we  have  the 
United  States  Leather  Co.,  with  their  tannery  at  War- 
saw, the  American  Hide  &  Leather  Co.  at  ]\Ierrill,  and 
the  Eastern  &  Western  Tanning  Co.  at  Tomahawk. 
So  the  three  places  are  taken  up  with  tanneries.  A  few 
years  after  this  circular  had  gone  out,  the  Wisconsin 
Central  put  on  a  commissioner,  and  he  has  done  twice 
as  much,  I  suppose,  as  the  St.  Paul  road. 


loo  LECTURES  ON  COMMERCE 

A  few  years  later  a  man  started  a  paper-mill — but  I 
will  cut  that  story  short.  In  1891  we  had  the  first  paper- 
mill  on  the  Wisconsin  River.  Today  there  are  nine 
paper-mills  there.  Another  man  tried  an  experiment, 
and  thought  he  would  make  paper  with  hemlock,  I 
said :  "We  have  just  located  a  big  tannery  up  there." 
"That  is  the  very  thing  for  me;  the  tannery  will  take 
the  bark  and  I  will  take  the  logs."  And  that  has  been 
done  since  then.  He  went  up  and  took  the  logs  that 
the  farmers  had  peeled. 

I  think  by  this  time  you  have  a  general  idea  of  how 
this  applies  to  almost  every  raw  material,  and  how  we 
start  the  development.  Then,  too,  we  had  to  establish 
good  hotels  at  these  towns.  For  instance,  if  you  go 
to  a  man  in  the  East  and  say,  "If  you  come  west,  and 
want  to  locate  a  factory,  I  will  take  you  to  Canary- 
ville" — if  he  cannot  get  a  decent  bed  there,  and  cannot 
get  anything  to  eat,  he  will  probably  not  locate  in 
Canaryville.  One  of  the  things  we  had  to  do  was  to 
encourage  good  hotels  through  the  West.  In  Wiscon- 
sin and  all  of  this  western  country  now  they  are  fairly 
good.  The  Waldorf-Astoria,  in  New  York,  cost,  fur- 
nished complete,  many  million  dollars.  I  recognize  it 
as  a  public-spirited  undertaking  which  reflects  credit 
on  the  owners  and  the  citizens.  If  you  cannot  enter- 
tain people  at  your  house,  if  you  are  living  in  a  small 
town,  at  least  see  that  there  is  a  good  hotel  there. 
For  instance,  at  Marinette  you  could  not  keep  a  man 
twenty- four  hours;  no  eastern  man  would  stay.  I 
called  the  business  men  together,  and  talked  to  them, 
and  they  said :  "We  will  subscribe  $75,000  to  a  hotel. 
If  we  make  6  per  cent.,  all  right ;  if  we  make  5  per 


RAILWAYS  AS  FACTORS  IN  DEVELOPMENT  loi 

cent.,  or  4  per  cent.,  all  right;  but  we  will  have  the 
hotel" — and  they  built  it.  [At  this  point  the  speaker 
was  interrupted  by  the  ringing  of  the  bell  which  an- 
nounces the  close  of  the  hour.]  But  there  is  the  engine- 
bell.    "Chicago,  all  out!" 


SOME  RAILWAY  PROBLEMS. 

PAUL     MORTON,     SECOND     VICE-PRESIDENT,     ATCHISON, 
TOPEKA    &    SANTA    FE    RAILWAY    SYSTEM. 

Next  to  agriculture,  the  transportation  business  of 
this  country  is  first  in  importance.  Production  first, 
distribution  second.  It  has  been  estimated  that  over 
one-fifth  of  the  wealth  of  the  United  States  is  invested 
in  railroads.  They  employ  directly  over  1,000,000 
men,  and  for  wages  alone  pay  out  nearly  $600,000,000 
annually,  while  the  total  annual  disbursements  of  the 
railroads  of  the  United  States  amount  to  nearly  twice 
as  much ;  and  yet  seventy  years  ago  the  locomotive  was 
unknown,  and  nowhere  in  the  world  did  a  railroad 
exist. 

In  1832  there  were  only  229  miles  of  railroad  in  the 
United  States,  while  today  there  are  over  200,000  miles 
of  track.  It  is  said  a  man  will  carry  66  pounds  twelve 
miles  per  day  over  bad  roads;  a  horse  will  carry  440 
pounds;  a  locomotive  will  haul  350,000  pounds  a 
greater  distance  in  an  hour  at  a  cost  of,  say,  half  one 
cent  per  ton  per  mile.  You  can  readily  see  the  strides 
made  in  transportation,  and  you  can  almost  measure 
the  progress  of  civilization  by  it. 

It  is  in  the  country  in  which  we  live  that  railroading 
has  made  its  greatest  strides,  and  we  should  all  be 
proud  of  the  fact  that,  notwithstanding  we  have  only 
about  one-twelfth  of  the  population  of  the  world,  we 
own  and  operate  fully  one-half  of  all  the  railway  mile- 
age of  the  globe. 

102 


SOME  RAILWAY  PROBLEMS  103 

It  is  with  considerable  satisfaction  that  we  should 
ponder  on  the  advantages  to  this  country  of  having  the 
cheapest  rates,  both  freight  and  passenger,  that  exist 
anywhere  in  the  world.  You  can  ship  freight  and  per- 
sonally travel  farther  for  less  money,  receive  better 
service,  and  enjoy  more  comfort  than  the  people  of 
any  other  section  of  the  earth.  This  is  one  of  the  domi- 
nant causes  of  our  success  commercially,  and  it  is  well 
to  keep  it  prominently  in  mind. 

The  average  rate  of  freight  charged  in  the  United 
States  in  1870 — about  thirty  years  ago — was  nearly 
three  times  as  much  as  is  charged  today,  or,  conversely, 
the  average  rate  per  ton  per  mile  now  in  existence  is 
only  a  trifle  over  one-third  of  what  was  paid  in  1870. 
American  railroad  rates  generally  are  more  than  one- 
third  lower  than  those  in  Great  Britain. 

In  my  opinion,  railroad  rates  should  be  unfluctuat- 
ing, and  without  preference  as  between  individuals  and 
communities.  From  the  beginning  of  railroads  until 
about  1870  there  were  very  few  laws,  either  state  or 
national,  for  their  regulation.  About  1872  an  agitation 
commenced  which  has  generally  been  referred  to  as  "the 
Granger  movement,"  and  all  kinds  of  railroad  legis- 
lation was  then  advocated.  There  seems  to  have  been 
a  delirium  for  regulation  of  passenger  and  freight 
rates  by  statute  epidemic  at  that  time.  The  first  na- 
tional law,  however,  that  was  considered,  was  known  as 
the  Reagan  bill,  and  from  this  sprung  the  present  law 
known  as  the  Interstate  Commerce  Law,  which  was 
designed  to  prevent  unjust  discriminations  in  rates;  but 
in  the  discussion  of  that  measure  the  feeling  against 
trusts  and  combinations  of  all  kinds  was  introduced. 


I04  LECTURES  ON  COMMERCE 

and  pooling  was  prohibited,  which  has  resulted  in  a 
continuation  of  preferential  rates — mostly  of  a  secret 
nature — all  of  which  are  a  menace  to  justice  and  fair 
play,  and  ought  to  be  obliterated.  At  the  time  of  the 
discussion  of  the  merits  of  the  Reagan  bill,  Judge  Rea- 
gan, the  originator  and  introducer  of  the  bill,  was 
against  pooling,  but  after  having  been  chairman  of  the 
Texas  Railroad  Commissioners  for  over  ten  years,  he 
has  changed  his  mind  and  now  favors  such  legalized 
pooling. 

The  competition  between  our  large  carriers  is  so 
intensely  energetic  that  it  seems  impossible  to  secure  a 
maintenance  of  rates  without  an  apportionment  of  the 
business.  The  longer  the  line  and  the  poorer  its  service 
between  any  two  competitive  points,  the  more  induce- 
ments it  is  tempted  or  obliged  to  offer  to  get  a  share  of 
the  traffic;  and  the  more  business  it  is  allowed  by  the 
stronger  or  shorter  lines  to  take,  the  greater  the  share 
it  is  educated  in  believing  itself  entitled  to;  so  that  it 
becomes  an  absolute  necessity  for  the  strong  lines  to 
recognize  the  competition  of  the  weaker  ones.  Large 
shippers  thoroughly  appreciate  this  and  are  quick  to 
take  advantage  of  it.  It  is  quite  remarkable,  under  ex- 
isting conditions,  that  rates  have  been  as  well  main- 
tained as  they  have  been.  The  old  saying  that  "compe- 
tition is  the  life  of  trade"  does  not  seem  to  hold  good 
in  the  present  age.  Carried  to  its  logical  conclusion, 
unrestricted  competition  is  the  death  of  trade.  It  is 
well  to  be  reasonable  in  all  things,  and  while  I  favor 
competition  in  service  and  think  it  should  continue,  I 
am  opposed  to  any  condition  that  reduces  rates  below 
cost  and  a  fair  margin  of  profit,  or  advances  them  to 
a  basis  that  may  properly  be  called  extortion. 


SOME  RAILWAY  PROBLEMS  105 

There  have  ah-eady  been  tremendous  strides  made 
in  combining  railways.  The  Atchison,  Topeka  &  Santa 
Fe  Railway  system  is  composed  of  over  one  hundred 
smaller  corporations.  Rates  are  now  lower,  service  is 
better,  and  wages  are  higher  than  before  the  consolida- 
tions took  place.  The  people  expect  more  from  large 
corporations  than  from  small  ones,  and  they  are  usually 
managed  more  intelligently  and  are  more  apt  to  respond 
to  public  opinion.  The  very  fact  that  they  represent  so 
much  capital  makes  them  quite  anxious  to  maintain  the 
good-will  of  the  community. 

The  best-disciplined  and  experienced  commercial 
minds  of  the  world  are  now  engaged  in  trying  to  work 
out  in  all  industrial  pursuits  a  plan  whereby,  through 
combination,  unrestricted  competition  will  cease,  labor 
and  capital  be  protected,  and  the  world  generally  be 
more  intelligently  and  better  provided  for. 

One  of  three  things  in  the  railroad  business  is  sure 
to  happen : 

1.  The  legalization  of  pooling,  whereby  the  rail- 
roads may  make  enforceable  contracts  between  them- 
selves for  a  division  of  the  business  based  on  reasonable 
rates. 

2.  The  unification  of  ownership,  which,  in  the  ab- 
sence of  the  first  proposition,  is  making  rapid  strides. 

3.  The  taking  over  of  the  railroads  by  the  govern- 
ment, to  own  and  operate  them  as  is  done  in  Germany 
and  some  other  European  countries. 

I  have  always  been  an  advocate  of  legalized  pooling, 
because  I  believe  it  will  go  a  long  way  toward  insuring 
a  maintenance  of  tariffs,  and  thereby  prevent  favoritism 
and  inside  rates  to  large  shippers  and  great  cities.     I 


io6  LECTURES  ON  COMMERCE 

believe  that  the  very  foundation  of  the  state  itself  is 
threatened  by  any  long-continued  discrimination 
against  the  small  shipper  and  the  small  town.  We 
want  prosperous  villages  and  towns  all  over  the  United 
States,  and  in  time  we  will  insist  that  the  freight  rates 
of  the  country  shall  be  as  unfluctuating  between  indi- 
viduals and  communities  as  the  price  of  postage  stamps. 

How  long  would  Chicago  stand  up  as  an  importing 
center  if  the  customs  favored  New  York  merchants 
with  a  lower  tariff?  The  importers  here  would  have  to 
buy  their  foreign  goods  through  New  York  agents, 
and  yet  the  question  of  custom-house  duties  is  a  very 
insignificant  one  as  compared  to  the  transportation 
charges  in  a  country  like  ours. 

I  can  see  no  good  reason  why  Congress  should  not 
legalize  pooling,  so  long  as  rates  are  reasonable.  Rates 
can  become  unreasonable,  and  there  is  as  much  to  fear 
from  their  being  unreasonably  low  as  from  being  un- 
reasonably high.  They  can  be  so  low  as  to  be  unre- 
munerative,  thereby  in  time  impairing  the  property  and 
destroying  the  service.  They  can  be  so  high  as  to 
check  the  movement  of  business.  The  selfish  interest 
of  the  carrier  generally  prevents  this.  There  should  be 
proper  supervision  to  see  that  they  are  reasonable, 
which  means  neither  too  high  nor  too  low  for  increas- 
ing and  promoting  commerce. 

The  absence  of  an  arrangement  similar  to  pooling 
is  causing  the  unification  of  ownership  of  our  railroads. 
This  is  now  frequently  referred  to  as  "the  community 
of  interests."  Personally,  I  prefer  it  to  pooling  and  do 
not  view  the  ownership  of  all  the  American  railroads 
by  a   single   company   or   interest   with   the   slightest 


SOME  RAILWAY  PROBLEMS  107 

alarm.  The  benefits  the  pubHc  would  receive  from  such 
a  condition  would  be  much  greater  than  any  harm  that 
could  come  from  it.  Unrestricted  competition  benefits 
a  few,  is  disastrous  to  the  many,  and  costs  too  much. 
There  is  a  vast  amount  of  money  wasted  every  day  by 
American  railroads,  which  ought  to  be  saved;  and  if 
it  could  be  saved,  the  railroads  of  the  country  would 
certainly  give  the  shipping  and  traveling  public  a  fair 
proportion  of  it,  either  in  lower  rates  or  an  improved 
service. 

It  has  probably  never  occurred  to  you  that  ever  since 
railroads  have  been  used  rates  have  been  getting  lower 
and  the  service  getting  better.  Fifty  years  ago  the 
large  proportion  of  the  travel  was  by  stage  at  twenty- 
five  cents  per  mile,  no  baggage  was  allowed  except  that 
which  you  carried  in  your  hand,  you  rode  three  in  a 
seat  with  the  greatest  discomfort,  and  made  forty  miles 
a  day  if  roads  were  good.  Now  you  can  travel  with 
the  greatest  of  luxury,  with  Pullman  cars  and  dining- 
cars,  for  about  2^  cents  per  mile,  and  make  forty  miles 
in  an  hour.  In  other  words,  the  transportation  of  the 
country  has  advanced  in  speed  from  forty  miles  per  day 
to  forty  miles  per  hour.  And  the  comforts  coined  by 
American  inventors  and  transportation  men  are  easily 
more  than  sixteen  to  one  in  the  circulation  of  com- 
modities and  persons  with  certainty,  celerity,  and  safe- 
ty throughout  this  vast  republic. 

When  all  the  railroads  are  owned  by  one  syndicate 
— it  looks  to  me  as  if  the  syndicate  would  be  composed 
of  the  people  generally — there  will  arrive  a  time  when  a 
vehement  demand  will  be  made  for  government  owner- 
ship and  operation  of  the  railroads  of  the  United  States. 


io8  LECTURES  ON  COMMERCE 

It  will  be  phenomenally  remarkable  if  such  demand 
does  not  come.  But  I  doubt  if  such  popular  impor- 
tunity will  result  in  the  transfer  of  the  railroads  from 
individuals  to  the  government,  because  it  is  manifestly 
demonstrable  that  private  parties  can  more  efficiently 
and  cheaply  operate  the  roads  than  can  the  govern- 
ment. 

There  are  many  things  against  the  ownership  and 
control  of  railroads  by  the  government.  The  building 
up  of  such  a  great  political  power  would  be  a  sufficient 
reason  for  opposing  such  an  ownership  and  manage- 
ment, but  the  simple  fact  that  the  government  seems 
unable  to  do  anything  efficiently  and  economically  in 
the  way  of  building  or  operating  properties  is  a  far 
better  reason  for  confining  our  government  to  legiti- 
mate functions  and  keeping  it  out  of  all  business,  except 
its  logical  one  of  protecting  the  life,  liberty,  and  prop- 
erty of  its  citizens. 

The  problems  that  a  railroad  traffic  officer  has  daily 
to  solve  are  so  diversified  and  interesting  that  they  are 
always  fascinating.  His  everyday  life  is  made  up  of  all 
kinds  of  surprises.  He  has  two  groups  of  citizens 
always  in  view,  one  being  his  employers — the  stock- 
holders of  the  company  he  serves — and  the  other  being 
his  constituency,  or  the  public  which  the  railroad  serves 
and  to  which  he  is  obliged  to  cater.  He  probably  finds, 
from  a  perusal  of  his  morning  mail,  that  there  has  been 
a  smash  in  copper  or  a  labor  strike  which  may  close  up 
some  mining  district  or  shut  down  some  industry;  or 
that  a  bad  frost  has  destroyed  the  fruit  crop ;  or  that  hot 
winds  have  burned  up  the  corn ;  or  that  a  war  declared 
between  two  foreign  countries  has  caused  a  great  de- 
mand for  transport  service,  thereby  taking  out  of  reg- 


SOME  RAILWAY  PROBLEMS  109 

ular  channels  such  a  large  number  of  ships  that  ocean 
freights  are  all  out  of  joint.  All  of  these  things  may 
make  it  necessary  to  readjust  rates  in  order  to  keep 
things  moving.  The  traffic  official  who  serves  his  con- 
stituency best,  and  thus  promotes  the  prosperity  of  the 
people  whom  his  company  serves,  serves  best  the  com- 
pany which  employs  him, 

I  believe  in  the  Interstate  Commerce  Commission,  or 
some  similar  body  of  men  appointed  by  the  federal 
government  with  power  to  supervise  rates  where  there 
are  pooling  contracts  in  existence,  and  believe  that  the 
law  should  be  more  comprehensive  than  it  is  now. 

I  believe  that  all  transportation  by  rail  and  Vv^ater 
should  be  declared  interstate  commerce  and  subject  to 
the  supervision  of  such  a  commission.     I  do  not  think 
there  is  sufficient  state  traffic  by  itself  anywhere  to  jus- 
tify excluding  it,  and  I  dislike  to  see  certain  states  tak- 
ing action  to  protect  the  people  within  their  own  bor- 
ders by  nullifying  orders  that  have  been  issued  in  the 
interest  of  the  country  generally  by  the  national  Inter- 
state Commerce  Commission.     If  we  are  to  have  a 
strong  federal  commission,  it  is  best  to  give  it,  if  possi- 
ble, full  power  over  all  traffic,  both  state  and  interstate. 
I  am  in  favor  of  the  English  custom  which  makes  it 
necessary  to  develop  reasons  for  a  railroad  before  it  is 
allowed  to  be  built.    Railroads  which  are  built  for  the 
sole  purpose  of  selling  out  to  lines  already  existing 
should  not  be  tolerated.     I  think  this  is  a  matter  that 
should  be  passed  upon  by  the  national  commission,  and 
that  no  railroad  should  be  chartered  unless  a  necessity 
for  it  is  clearly  shown.     Duplication  and  paralleling  of 
railroads  is  a  waste  of  money.     The  public  finally  has 
to  bear  the  burden  of  all  unnecessary  railroads.    A  rail- 


no  LECTURES  ON  COMMERCE 

road  may  be  likened  to  a  street  in  a  large  city :  it  costs 
money  to  build  a  street  and  to  keep  it  in  order,  and  the 
citizens  have  to  pay  for  it.  Therefore,  unnecessary 
streets,  as  a  rule,  are  not  constructed,  and,  in  view  of 
the  control  and  regulation  already  partially  assumed  by 
the  state  and  national  governments,  I  think  that  a  sim- 
ilar protection  to  railroad  investors  and  to  the  people 
themselves  may  be,  and  ought  to  be,  demanded  and 
accorded. 

To  conclude,  I  desire  to  say  to  you  that  the  railroad 
business  is  a  very  fascinating  occupation,  and  that  it 
affords  to  young  men  as  good  a  field  of  labor  as  any 
other  avocation.  It  is  not  regarded  as  a  profession, 
although  v^ithout  doubt  it  is  just  as  much  of  a  profes- 
sion as  either  law  or  medicine,  and  within  its  bounda- 
ries are  just  as  many  opportunities  for  specialists  as  in 
either  of  the  professions  mentioned. 

There  is  now,  and  always  will  be,  a  great  demand 
for  capable  men,  of  good  judgment;  and  it  seems  to 
me  that  every  branch  of  the  railroad  business  affords 
great  opportunity  to  young  men.  My  advice  to  the 
young  man  who  wants  to  acquire  a  knowledge  of  rail- 
roading is  to  start  on  as  small  a  road  as  possible,  where 
he  can  get  a  knowledge  of  all  departments.  After  ac- 
quiring more  or  less  knowledge  of  the  workings  of  the 
several  departments,  it  will  be  easy  for  him  to  decide 
which  particular  department  he  prefers.  Of  course,  a 
young  man  cannot  always  decide  this  matter  for  him- 
self, and  under  such  circumstances  he  should  endeavor 
to  master  any  work  that  is  given  him,  with  the  well- 
defined  idea  that  good  men  are  scarce,  and  that  there 
is  always  room  at  the  top,  which  can  only  be  reached  by 
intelligence,  industry,  and  integrity. 


RAILWAY    CONSOLIDATION. 

E.    D.    KENNA^    V'ICE-PRESIDENT,    ATCHISON,    TOPEKA    & 
SANTA   FE  RAILWAY   SYSTEM. 

This  appeal  to  the  laity  by  your  faculty  has  been 
made,  I  take  it,  in  the  hope  that  we  may  place  before 
you  the  problems  confronting  us,  the  facts  out  of  which 
they  arise,  and  the  remedies  suggested. 

Today  we  are  to  consider  the  consolidation  of  rail- 
ways ;  but,  in  studying  any  part  of  the  railroad  question, 
I  warn  you  against  confounding  it  with  the  trust  prob- 
lem. They  are  not  correlated,  and  each  must  be  viewed 
by  the  student  from  entirely  different  standpoints. 
Property  controlled  by  a  trust  is  private  property,  and 
its  business,  private  business.  Any  man  with  sufficient 
money  and  brains — and  the  former  will  command  the 
latter — may  become  a  trust.  But,  what  is  more  im- 
portant, as  indicating  the  distinction,  he  can  cease  to 
do  business  when  he  so  chooses.  On  the  contrary,  a 
railroad  must  remain  for  the  use  of  the  public,  even 
though  the  same  cannot  be  operated  except  at  a  loss. 
Furthermore,  the  carrier  must  sell  its  commodity, 
which  is  transportation,  to  all  customers  on  equal  terms, 
which  the  public  may  fix,  if  it  desires  to  do  so.  The 
difference  between  a  trust  and  a  railroad  company,  in 
the  respect  I  have  mentioned,  is  practically  the  same  as 
the  difference  between  the  business  of  a  manufacturer 
largely  controlling  the  making  of  letter  paper  and  the 
Post-Office  Department  of  the  government. 

While  today's  topic  presents,  apparently,   but  one 

III 


112  LECTURES  ON  COMMERCE 

aspect  of  the  railroad  problem,  yet  the  subject  involves 
so  many  of  its  phases  that  we  must  review  it  in  its  en- 
tirety, if  we  are  to  consider  it  fairly.  Fully  to  under- 
stand the  subject,  it  is  necessary  to  state  that  the  policy 
advocated  in  the  way  of  combinations  and  consolida- 
tions will  do  away  entirely  with  competition  between 
carriers.  As  this  is  a  course  which  has  long  been  op- 
posed by  the  American  people,  those  who  favor  it 
realize  that  the  difficulty  of  making  their  case  before 
the  bar  of  public  opinion  rests  with  the  advocates  of 
such  policy.  Many  of  its  advocates  are  railway  men, 
and,  while  their  statements  may  not  convince  you  of 
the  correctness  of  the  conclusions  founded  on  them,  yet 
the  deliberate  and  honest  opinions  of  men  who  have 
faced  for  years  the  hard  and  intricate  problems  of  rail- 
roading are  certainly  worth  all  that  is  asked  for  them — 
a  fair  and  unprejudiced  hearing.  And,  I  assure  you, 
as  one  knowing  them  well,  that  these  men  appreciate 
your  judgments,  based  on  their  experiences,  for  they 
realize  that  a  student  may  often  extract  a  truth  in  the 
laboratory  that  lies  hidden  in  the  forge.  You  will  do 
them  a  service  to  expose  the  fallacies  of  their  beliefs — 
if  they  do  not  convert  you.  I  do  not  believe  these  men 
have  seen  all  the  light  on  the  subject,  nor  do  they.  Nor 
do  I  believe  that  anyone  has  yet  offered  a  solution  of 
the  problem.  That  is  too  much  to  be  expected  at  this, 
the  infant  stage  of  the  greatest  business  of  the  times ;  a 
business  that  has  drawn  together  the  people  of  the 
nation  as  no  ordinance  could  have  done,  and  which  may 
yet  change  the  map  of  the  world. 

"Combinations,"  "pools,"  "consolidations,"  are  all 
misleading  terms,  and  narrow  the  question.    They  deal 


RAILWAY  CONSOLIDATION  113 

with  specific  remedies,  or  offenses,  according  to  our 
point  of  view.  The  broad  question  presented  is  whether 
competition  between  carriers  is  to  be  favored  or  op- 
posed. 

The  original  idea  was  that  railroads  were  to  be,  as 
canals  had  been,  highways  that  anyone  might  use,  on 
the  payment  of  tolls,  each  patron  furnishing  his  own 
equipment.  And  at  that  time  this  arrangement  ac- 
corded exactly  with  the  understanding  of  the  general 
nature  of  a  railway.  It  was  rightly  considered  to  be  a 
highway,  which  all  might  use  on  terms  of  exact  equal- 
ity; differing  in  no  principle  of  relationship  to  the 
public  from  a  canal,  a  road,  or  a  street.  Thus,  in  the 
beginning,  all  seemed  satisfactory.  Private  capital  fur- 
nished the  money,  and  only  those  directly  benefited  by 
the  use  of  the  railway  were  to  be  required  to  pay,  and 
they  might  use  all  its  facilities  on  terms  of  precise 
equality.  It  was  not  apprehended  that  there  would  be 
obstacles  in  the  way  of  a  man  bringing  his  own  engines 
and  cars,  and  engaging  in  the  business  of  carrjdng, 
which  was,  of  course,  considered  a  private  business. 
Our  forefathers  did  not  realize  that  it  would  not  be  as 
easy  to  run  one's  own  train  on  a  railroad  as  it  had  been 
to  navigate  one's  own  boat  on  a  canal.  When  it  was 
found  impracticable  to  have  every  traveler  transport 
himself,  and  the  exclusive  right  to  operate  was  given 
a  corporation,  its  officers  forgot  that  the  railways  re- 
mained public  highways,  and  the  people  forgot  that 
they  had  created  monopolies  and  contracted  to  afford 
them  certain  protection.  The  people  had  expected  that 
the  railways  would  open  up  inland  ways,  and  would 
be  to  domestic  commerce  what  the  ocean  was  to  foreign 


114  LECTURES  ON  COMMERCE 

trade.  They  expected  that  there  would  be  competition 
on  such  railways,  engaged  in  by  private  carriers,  just 
as  there  was,  and  still  is,  on  the  ocean.  Note  this  well ; 
for  such  a  proposition  is  at  utter  variance  with  our 
present  views,  that  wheat  shall  be  carried  from  the  field 
to  the  seaboard  at  the  same  price  for  every  shipper,  but 
from  such  point  to  the  world's  markets  each  shipper 
shall  be  free  to  get  any  advantage  he  can. 

The  first  charters  were  specially  granted  by  state 
legislatures,  three  only  having  been  granted  by  Con- 
gress, and  these  to  aid  the  construction  of  the  Pacific 
railroads.  With  such  national  needs  fully  met,  Con- 
gress ceased  to  grant  railway  charters,  its  latest  being 
dated  1866.  But  it  was  soon  found  that  railway  con- 
struction was  being  held  back  because  legislatures  only 
met,  as  a  rule,  biennially;  and  it  was  concluded  that 
time  was  wasted  in  requiring  the  promoters  of  such 
projects  to  remain  inactive  during  such  intervals;  and 
therefore  general  laws  were  passed  which  allow  any 
persons,  generally  required  by  statute  to  be  not  less 
than  five  in  number,  to  build  to  and  from  any  point 
that  may  be  designated  in  the  "Articles  of  Association." 
They  pay  nothing  for  the  franchise  they  get,  save  a 
nominal  filing  fee.  In  no  state  is  the  incorporation  tax 
large,  and  until  quite  recently  one  could  get  a  charter 
to  build  from  Chicago  to  the  Pacific  coast  for  less  than 
$100.  It  would  probably  cost  now  $1  for  each  $1,000 
of  capital  fixed.  And  why  should  these  charters  cost 
anything?  They  have  no  special  value.  Anybody  can 
get  them.  A  railway  charter,  it  is  true,  carries  with  it 
a  monopoly  of  doing  the  carrying  business  on  that 
railway;  but,  as  there  is  no  monopoly  of  territory  or 


RAILWAY  CONSOLIDATION  115 

location  granted,  it  is  no  more  valuable  than  would  be 
a  street-car  franchise,  if  one  could  get  an  ordinance  to 
build  on  any  street,  and  the  streets  were  so  broad  that 
an  indefinite  number  of  lines  could  be  built  thereon. 
I  do  not  question  that,  on  the  whole,  the  policy  of 
attaching:  no  value  to  a  railroad  franchise  has  been 
more  useful  than  harmful.  If  railroads  have  been  en- 
couraged thereby  that  ought  not  to  have  been  built,  it  is 
also  true  that  railroads  have  been  built  that  were 
needed,  and  which  otherwise  might  have  been  pre- 
vented. But  many  of  the  present  difficulties  arise  from 
the  utter  lack  of  restraint  on  unwise  and  reckless  rail- 
road construction;  and  greater  ones  are  yet  to  be  en- 
countered if  such  policy  is  persisted  in. 

It  was  early  seen  that  a  single  corporation  owning 
a  line  from  New  York  to  Buffalo  was  preferable  to 
many  small  corporations  each  owning  a  part  of  the 
line.  The  line  of  the  New  York  Central  between  the 
Hudson  and  Lake  Erie  represents  the  union  of  what 
was  originally  sixteen  different  companies.  It  soon  be- 
came the  general  policy  of  all  states  to  authorize  cor- 
porations owning  continuous  lines  that  could  be  con- 
nected physically  to  enter  into  arrangements  whereby 
such  lines  might  be  operated  as  a  single  railway.  This 
resulted  in  the  disappearance  of  many  small  companies, 
and  the  constant  absorption  of  branch  lines  as  they  were 
built.  So  great  are  the  economical  advantages  and  the 
convenience  of  such  arrangements  that  the  present 
policy  is,  not  only  to  foster  like  combinations,  but  to 
compel  the  maintenance  of  through  lines,  divisions  of 
rates,  and  exchange  of  cars.  It  is  interesting  to  note 
that  when  the  consolidation  of  connecting  and  continu- 


ii6  LECTURES  ON  COMMERCE 

ous  lines  was  first  suggested  many  people  were  as 
furious  in  their  assaults  on  the  laws  that  authorized 
such  consolidations,  and  as  emphatic  in  their  declara- 
tions of  the  dangers  that  lurked  beneath  the  same,  as 
are  the  opponents  today  of  consolidation  by  competing 
carriers.  I  do  not  mean  to  draw  a  parallel,  but  merely 
to  suggest  that  the  fears  of  our  citizens  are  easily 
excited. 

In  using  the  term  "consolidation"  today,  I  shall 
wholly  disregard  the  legal  definition  of  that  term,  which 
means  the  process  by  which,  under  authority  of  law, 
two  or  more  corporations  are  merged  into  one;  and 
shall  treat  as  a  combination  or  consolidation  every  ar- 
rangement that  permits  one  management  to  replace  two 
or  more  previously  independent.  And  I  shall  assume 
that  nearly  everyone  admits  now  that  a  continuous  line, 
with  connecting  branches,  is  preferable  to  many  dis- 
connected lines,  operated  by  many  corporations.  In 
other  words,  I  shall  assume  that  we  have  been  progress- 
ing in  the  character  of  service  furnished  the  public, 
however  slow  our  advance  may  have  been  in  solving 
the  problem,  and  therefore  pass  on  to  the  question  of 
how  the  problem  is  affected  by  what  is  proposed  under 
any  form  of  combination  or  association,  agreement,  or 
consolidation,  whereby  competition  between  carriers 
may  be  restrained  or  removed. 

What  is  the  railroad  problem?  As  was  said  years 
ago :  "The  troubles  that  are  always  present,  always 
annoying,  and  always  difficult  of  adjustment  are  those 
which  relate  to  the  making  of  rate-sheets,  and  to  the 
manner  in  which  these  are  observed  or  treated  after 
they  are  made."  But  such  a  definition  of  the  problem  is 


RAILWAY   CONSOLIDATION  117 

faulty,  in  that  it  disregards  both  the  pubhc's  interest 
and  the  owners'  in  reheving  carriers  from  all  unneces- 
sary restraints.  I  think  there  is  no  longer  any  mis- 
understanding between  fair-minded  men  as  to  what 
are  the  rights  of  the  parties,  respectively.  The  people 
demand,  and  are  entitled  to,  reasonable  rates,  and  they 
ask  to  be,  and  should  be,  secured  against  unjust  dis- 
criminations affecting  either  persons  or  places.  The 
owners  expect,  and  are  entitled  to  receive,  a  reasonable 
profit  on  their  investment  and  some  compensation  for 
their  risk. 

I  think  we  will  all  concede  now  that  this  problem 
cannot  be  met  without  legislation.  I  am  one  of  those 
who  long  entertained  a  contrary  view.  But  when  it 
was  judicially  determined  that  the  business  of  a  carrier, 
originally  considered  private,  should  be  regarded  as  of 
a  public  character  in  its  most  important  aspect,  and 
held  that  its  cars  and  engines,  and  even  carts  and 
horses  if  used  to  perform  a  terminal  service,  are 
affected  by  a  public  use,  then  it  seemed  to  me  to  be- 
come the  duty  of  everyone  to  recognize  that  the  state, 
which  can  only  give  its  directions  through  laws,  should 
be  aided  by  its  citizens  in  formulating  such  laws. 

And  now  let  us  view  what  the  public  has  done  in 
the  way  of  regulating,  or  rather  attempting  to  regulate, 
the  railway  companies.  The  right  to  regulate  was  not 
expressly  reserved  in  any  of  the  early  charters,  and  it 
was  contended,  with  reason,  that  no  such  reservation 
had  been  made.  Few  roads  would  have  been  built  with 
private  capital  had  it  been  known  that  the  time  would 
come  when  the  people  would  assert  the  right,  not  only 
to  make  rates,  but  to  sav  that,  while  the  investor  risked 


ii8  LECTURES  ON  COMMERCE 

losing  his  whole  investment,  he  would  never  be  allowed 
to  make  over  6  per  cent.  But  with  our  prairies  a  waste 
and  our  forests  impenetrable,  with  the  riches  of  the 
Rockies  lying  useless  and  the  most  wonderful  valley 
yet  a  frontier,  it  was  not  the  time  for  the  people  to 
startle  capital  with  the  warning :  "You  risk  your  whole 
venture,  and,  when  it  is  made,  we  reserve  the  right  to 
say  how  much  you  may  gain."  Yet  that  was  the  time 
when  the  people  should  have  been  outspoken.  That 
they  were  not  is  a  charge  of  which  they  must  always 
stand  convicted. 

But  if  the  people  erred  in  the  first  instance,  the  rail- 
roads soon  evened  matters.  The  people  had  been  more 
than  generous.  The  railroads  were  less  than  just. 
Their  claims,  if  not  unreasonable,  seemed  intolerable. 
All  companies  asserted  the  right  to  make  any  rate  and 
practice  any  discrimination.  They  even  resisted  at- 
tempts at  regulation  in  matters  concerning  public 
safety.  But  nothing  is  so  dangerous,  nothing  so  brief, 
as  absolute  immunity  from  any  control ;  and  the  calam- 
itous contest  of  the  early  seventies  we  all  know — some 
of  us  from  history,  some  of  us  from  actual  contact. 
The  people  lost  all  sense  of  justice  and  became  wholly 
indifferent  to  all  rules  of  fair  play.  "Hang  the  rail- 
roads, and  try  them  afterward,"  a  legislator  was  heard 
to  say  publicly.  The  first  battle  was  short.  The  con- 
tention of  the  people  in  support  of  a  legislative  right 
to  control  carriers  was  sustained  by  the  courts.  Then 
began  the  long  struggle.  Under  such  power,  confisca- 
tion was  attempted,  and  men  wondered  for  a  time  if 
rights  of  property  were  to  remain  inviolable.  Happily, 
the  threatened  wrong  was  prevented  by  the  wise  limi- 


RAILWAY  CONSOLIDATION  119 

tations  of  our  constitution.  I  believe  it  substantially  a 
correct  statement  that,  at  one  time  or  another,  the 
people  have  tried  by  experimental  legislation  every  sug- 
gested solution  of  the  problem  except  two :  government 
ownership,  and  authorized  agreements  to  maintain 
rates. 

The  result  of  trying  everything  has  been  what  might 
have  been  expected  of  such  a  course :  a  set  of  laws 
lacking  system,  irreconcilably  inconsistent,  and  utterly 
impracticable. 

I  take  it  you  are  all  familiar  with  the  Act  to  Regu- 
late Commerce,  by  which  Congress  created  the  Inter- 
state Commerce  Commission,  and  which  provides  that 
rates  shall  be  reasonable  and  just;  that  unjust  discrimi- 
nation shall  be  punished;  that  rates  open  to  all  shall 
be  published  ten  days  in  advance  of  any  changes  there- 
in; that  a  greater  rate  shall  not  be  charged  for  the 
shorter  haul  than  for  the  longer  one,  the  former  being 
included  within  the  latter,  and  in  the  same  direction; 
and  that  pooling  shall  be  unlawful.  Most  of  the  states 
have  similar  laws,  and  many  authorize  their  commis- 
sions to  fix  rates  also.  With  this  single  exception,  the 
powers  of  the  national  and  state  commissions  have  been 
substantially  the  same  for  years.  The  student  will  ob- 
serve that  the  public  now  concluded  that  unrestrained 
competition  between  carriers  was  undesirable,  and 
that  passenger  fares  and  freight  charges  should  be — 
like  postal  rates — reasonable,  uniform,  and  stable;  and 
that  the  railways,  in  their  capacity  as  carriers  as  well 
as  owners  of  public  highways,  should  be  treated  as 
public  servants,  and  regulated  accordingly.  For  it  was 
easily  seen  that,  if  a  shipper  was  permitted  to  secure  a 


I20  LECTURES  ON  COMMERCE 

lower  rate  than  his  business  rival,  the  government 
w^ould  be  placed  in  the  attitude  of  allowing,  through  its 
policy  and  laws,  one  citizen  to  secure  unjust  advantages 
over  another.  And  so  it  was  declared  that  there  should 
be  one  rate  for  all,  and  it  a  published  rate,  that  should 
not  be  changed  without  timely  notice.  The  people 
rightly  declared  that  rates  should  be  reasonable  and  that 
unfair  practices  must  cease,  but  they  acted  irrationally 
when  they  tied  the  hands  of  a  useful  servant.  It  is 
unwise  to  shackle  even  a  slave.  The  responsibility  for 
the  Act  to  Regulate  Commerce  rests  with  the  people. 
Every  railroad  man  in  America  said  that  in  its  present 
form  it  would  be  a  failure.  Most  students  of  the  prob- 
lem thought  so.  They  did  not  hesitate  to  say  why,  nor 
to  give  their  opinions  under  oath.  Aside  from  the 
long-  and  short-haul  clause — a  hurtful  provision,  if 
intended  to  mean  what  some  contended  it  did  mean;  a 
useless  one,  as  it  stands  under  the  decisions — the  one 
great  point  of  difference  was  whether  pooling  should 
be  authorized.  Out  of  one  hundred  and  forty-nine  per- 
sons who  testified  before  the  Senate  committee,  which 
reported  the  Commerce  Law,  and  of  whom  only  twenty 
were  railroad  men,  ninety-four  favored  pooling.  A 
majority  of  men  thoughtful  on  the  subject  had  reached 
the  conclusion  that,  if  a  railroad  was  to  be  regulated  as 
an  arm  of  the  public  service,  then  uniformity  of  rates 
was  the  first  consideration,  and  stability  of  rates  the 
second.  Competition  means  varying  rates,  seldom  the 
same  today  as  yesterday,  and  more  rarely  the  same  to 
all  patrons.  When  we  say  competition  is  the  life  of 
trade,  we  mean  that  the  bidding  for  business  which  is 
accompanied  by  constant  reductions,  secret  prices,  dis- 


RAILWAY  CONSOLIDATION  121 

counts,  and  premiums  is  a  good  thing  for  the  buyer. 
We  mean  that  we  want  to  be  privileged  to  buy  the  same 
article  on  the  same  day  at  a  lower  price  than  our  neigh- 
bor. And  we  are  willing  that  he  should  drive  a  better 
bargain  than  we  are  able  to  secure.  But  when  we  ap- 
ply, in  a  vapid  way,  the  same  principle  to  a  company 
furnishing  a  public  utility  that  all  men  use,  we  mean 
nothing  of  the  kind,  which  is  another  way  of  saying  we 
don't  know  just  what  we  do  mean.  The  advocates  of 
pooling  foresaw  that,  as  a  carrier  can  take  no  business 
away  from  a  competitor  by  an  open  rate,  of  which  due 
notice  is  given  such  competitor,  the  only  way  to  get 
business  by  reducing  the  rate  would  be  to  give  it 
secretly.  But  the  people  were  biased  against  pooling 
— I  use  such  term  as  including  all  agreements  to  divide 
business — as  a  means  of  maintaining  rates.  If  there 
is  anything  more  blind  than  prejudice,  I  know  not 
what  it  is.  If  there  is  anything  worse  than  being  blind, 
it  is  being  blind  and  trying  to  walk  alone.  In  this  case, 
unfortunately,  the  public  would  have  no  leader,  and  it 
staggered  along  as  best  it  could,  and  refused  the  as- 
sistance offered  to  prevent  these  depredations  of  mod- 
ern days  that  are  as  hurtful  to  honest  trade  as  piracy 
was  of  old.  Such  men  as  Judge  Cooley,  whose  ordina- 
rily judicial  temperament  would,  at  the  mention  of  a 
trust,  give  way  to  the  fervor  of  a  public  prosecutor, 
said,  in  words  of  warning : 

Experience  has  shown  that  this  idea  of  railroad  competition 
is  a  mistaken  one;  that  it  cannot  be  compared  with  competition 
in  channels  of  commerce  in  general ;  ....  it  is  utterly  impos- 
sible to  judge  of  railroad  competition  and  its  efifects,  its  useful- 
ness and  its  mischiefs,  by  comparing  it  with  competition  as  we 
encounter  it  in  other  lines  of  business. 


122  LECTURES  ON  COMMERCE 

Again  he  said : 

There  is  a  demand  for  legislation  that  will  secure  at  the  same 
time  steadiness  of  rates  and  unrestrained,  and  even  active,  com- 
petition, things   which   necessarily  kill   each  other. 

How  clearly  he  foresaw  we  know  now,  for  they  have 
killed  each  other.  There  is  neither  stability  of  rates 
nor  honest  competition.  The  opponents  of  pooling  tri- 
umphed. For  the  evil  consequences  I  refer  you  to  the 
most  recent  report  of  the  Commerce  Commission. 

It  may  be  said  the  Commerce  Commission  has  not 
been   given  the  power   to   fix   rates.      That   is   true. 
But  nearly  every  state  commission  has,  and  if  such 
power  was  the  corrective  claimed  for  it  by  its  advo- 
cates  they  should  be  able  to  cite  at  least  one  instance 
where  it  has  been  successful,  among  the  many  where 
it  has  been  tried.    The  commission  has  said  the  great, 
and  so  far  irremediable,  evil  is  unjust  discrimination. 
That  this  class  of  offenses  cannot  be  prevented  by  giv- 
ing to  commissioners  the  power  to  fix  rates,  everyone 
should  know,  for  all  business  within  such  states  is  sub- 
ject to  the  jurisdiction  of  state  laws,  as  comprehensive 
as  any  ever  advocated  for  the  nation.     And  yet  every 
experienced  person  knows  there  yet  remains  in  such 
state  laws  a  defect  as  serious  as  any  lack  in  the  Act 
to    Regulate    Commerce.      Nevertheless,  today,  after 
years  of  failure,  many  are  following  the  leadership  of 
men  who  advocate  for  the  nation  nothing  that  has  not 
been  unsuccessfully  tried  by  the  states  and  found  to  be 
inadequate.     The  truth  is,  there  is  no  connection  be- 
tween the  making  of  a  rate  and  the  keeping  of  it.    The 
first  is  a  function  that  will  produce  the  same  results, 
whether  exercised  by  a  carrier  or  by  a  commission. 


RAILWAY  CONSOLIDATION  123 

But  while  the  Commerce  Act  prohibited  pooHng,  it 
permitted  the  carriers  to  agree  to  maintain  the  rates, 
which  by  the  terms  of  such  act  they  were  required  to 
make  and  maintain.  And  so,  in  a  restricted  way,  the 
railways  were  striving,  as  best  they  could,  without  the 
right  to  pool  or  to  divide  business,  to  keep  the  law, 
when  was  enacted  by  Congress  the  most  contradictory 
piece  of  legislation  in  all  history.  A  law  was  enacted 
by  Congress  popularly  known  as  the  Anti-Trust  Act. 
Its  framers  and  advocates  said,  while  it  was  being 
debated  on  the  floor  of  Congress,  that  it  was  not  to 
apply  to  railroads.  But  the  Supreme  Court  said  it  did. 
Commanded  to  maintain  rates,  and  forbidden  to  agree 
to  do  so,  told  that  stability  was  the  one  thing  the  public 
required,  and  that  instability  was  the  one  thing  it  pro- 
posed to  have,  the  owners  saw  but  one  practical  way 
in  which  a  company  could  do  what  it  was  commanded 
to  do,  and  yet  forbidden  to  do,  in  concert  with  other 
companies.  And  then  began  the  movement  which 
threatens  to  terminate  in  a  few  men  directing  the 
affairs  of  all  the  railroads  in  America.  This  is  some- 
thing all  owners  do  not  want,  and  which  many  railway 
officials  deplore.  It  has  come  as  the  result  of  an  ab- 
surd, contradictory  set  of  laws,  that  has  worked  no 
good  for  the  people,  and  harmed  every  interest,  except 
the  favored  few.  Even  those  who  think  a  single  own- 
ership inevitable  must  concede  the  time  for  it  has  not 
come.  Neither  individuals  nor  the  whole  people  are 
prepared  for  such  a  tremendous  undertaking  as  the 
management  of  all  the  roads  as  a  single  concern.  Too 
much  is  yet  experimental  for  one  man's  will  to  be  ab- 
solute in  any  of  the  departments  of  service  with  advan- 


124  LECTURES  ON  COMMERCE 

tage  to  the  public  or  to  the  owners.  We  need  the  Hght 
of  much  independent  direction,  the  lessons  that  come 
from  many  ways  of  doing  the  same  thing,  while  con- 
ditions yet  remain  in  the  formative  state.  Nor  is 
there  need  for  great  consolidations,  if  the  people  will 
lay  aside  prejudice.  All  that  the  roads  require  is  to  be 
allowed  to  enter  into  those  arrangements  that  will 
lessen  the  cost  of  transportation  and  enable  the  lines 
to  agree  upon  plans  that  will  prevent  secret  rate- 
cutting  and  secure  stable  rates.  The  question  arises : 
Would  that  not  mean  a  monopoly?  The  answer  is: 
It  means  no  more  than  that  the  people  should  tolerate 
that  which  they  would  be  forced  to  accept  if  the  gov- 
ernment owned  the  railroads.  Then  there  would  be 
but  one  rate.  Why  should  there  be  today  one  for  me 
and  another  for  my  powerful  competitor,  who  can 
secure  by  threats  an  advantage  that  may  w^ork  my 
financial  ruin?  It  is  a  sad  thought  that  a  principle  de- 
fended as  the  life  of  trade  is  exterminating  the  small 
trader.  Before  carriers  can  reduce  rates  they  must  be 
enabled  to  carry  more  cheaply.  The  underlying  prin- 
ciple of  cheap  transportation  is  density,  which,  put 
simply,  means  that  fifty  passengers  can  be  carried  in  a 
single  coach  at  less  cost  per  passenger  per  mile  than 
could  ten;  that  to  haul  two  thousand  tons  in  a  train 
enables  the  carrier  to  carry  each  ton  cheaper  than  when 
only  one  thousand  tons  are  carried,  wdth  the  same 
power  and  crew.  To  get  the  full  use  out  of  units  of 
energy  is  the  great  economical  problem.  Larger  en- 
gines, heavier  rails,  and  stronger  bridges  have  come 
into  use.  Today  railway  officials  are  asking :  If  a  bet- 
ter use  of  equipment  produces  cheaper  transportation, 


RAILWAY  CONSOLIDATION  125 

why  would  not  a  more  prudent  use  of  all  the  railroads 
do  much  more  in  the  same  direction?  Why  haul 
freight  on  a  high-grade  line,  when  there  is  a  low- 
grade  one?  Why  send  passengers  over  the  circuitous 
route,  when  a  shorter  and  safer  one  is  open?  Why 
not  give  all  the  public  the  use  of  the  best  line,  and 
carry  all  the  business  in  such  a  way  that  it  will  be 
done  at  the  least  aggregate  cost?  This  will  save  in 
expenses  and  make  possible  lower  rates.  In  brief,  the 
principle  of  density  will  not  have  performed  its  full 
function  until  traffic  is  concentrated  on  the  lines  best 
fitted  to  carry  it.  It  is  one  of  the  strangest  phases  of 
this  vast  subject  of  transportation  that  the  shipper  has 
wilfully  shut  his  eyes  to  the  fact  that  he  is  directly  and 
greatly  concerned  in  every  factor  of  transportation  ex- 
pense, and  benefited  by  every  saving.  He  has  seemed 
to  think  that  only  the  stockholder  is  interested  in  the 
economies  practiced  by  the  companies,  when  the  truth 
is  that  every  saving  benefits  the  shipper.  For  it  is  in- 
disputable that,  as  carriers  have  been  enabled  to  carry 
more  cheaply,  they  have  voluntarily  reduced  rates,  and, 
had  they  not  done  so,  they  would  have  been  compelled 
to  do  so.  It  is  the  people  who  pay  for  every  unneces- 
sary agency  and  every  unnecessary  train.  Ought  they 
not  to  be  willing  to  work  for  a  cheaper  service,  if  it  is 
also  a  better  service?  And,  lest  there  be  some  fear  that 
such  a  service  might  become  inferior,  I  beg  to  cite  a 
few  instances  that  prove  it  need  not  be.  Between  Bos- 
ton and  New  York  there  is  but  one  carrier;  between 
New  York  and  Washington  there  is  but  one  interest 
in  control;  and  there  is  also  but  one  between  Albany 
and  New  York;  and  yet  I  dare  to  say  there  is  no  better 


126  LECTURES  ON  COMMERCE 

passenger  service  in  America  than  is  maintained  by 
these  three  monopoHes.  We  have  but  one  custom- 
house and  one  post-office;  why  have  more  than  one 
depot?  We  should  become  indignant  at  the  sugges- 
tion of  paralleling  a  canal,  because  in  such  case  we 
should  be  taxed  to  sustain  an  unnecessary  public  bur- 
den. But  do  we  not  sustain  every  railroad,  and  encour- 
age the  construction  of  some  that  are  not  needed  ?  Do 
we  not  pay  the  cost  of  every  train,  and  yet  insist  that 
they  shall  be  duplicated,  without  reason  ?  The  railroad 
always  has  been,  and  always  will  be,  a  monopoly  to 
the  town  that  has  but  one  road.  There  is  practically 
but  one  line  in  the  greater  part  of  Pennsylvania,  and 
no  state  has  been  so  dependent  upon  cheap  rates  to 
develop  its  industries — none  more  successful.  There 
is  but  one  system  today  between  the  Ohio  river  and  the 
Atlantic  coast,  and  yet  the  average  rate  per  ton  per 
mile  there  is  the  lowest  in  the  world.  Of  course,  these 
conditions  are  not  due  to  the  generosity  of  the  carrier, 
but  they  ought  to  convince  anyone  that  other  causes 
than  competition  affect  good  service  and  produce  low 
rates;  and  it  ought  not  to  be  necessary  to  argue  that 
the  carriers  should  be  allowed  to  do  their  business  in 
the  way  that  is  most  economical,  provided  some  public 
administrative  body  is  given  the  power  to  say  how  the 
savings,  effected  by  the  maintenance  of  rates  and  ap- 
portionment of  business,  shall  be  divided  between  the 
shipper  and  the  company. 

But,  it  will  be  asked,  are  the  railroads  willing  to 
surrender  that  which  they  have  regarded  until  now  as 
all  that  is  left  them  and  worth  fighting  for?  I  cannot 
say.     But  I  know  there  are  many  who  do  believe  that, 


RAILWAY  CONSOLIDATION  127 

if  railway  officials  are  given  the  right  to  meet  in  con- 
ference with  other  officials,  to  apportion  traffic,  or  earn- 
ings therefrom,  and  to  make  lawful  agreements  to 
maintain  rates;  and  if  the  companies  are  given  the 
right  to  contest  in  a  reasonable  way,  before  a  judicial 
tribunal,  such  administrative  orders  as  are  thought  to 
be  unreasonable,  and  also  the  right  to  have  the  opera- 
tion of  such  orders  stayed  until  their  reasonableness, 
in  case  of  dispute,  shall  have  been  passed  upon  by  a 
court — then  the  commerce  commission  should  be  given 
the  right  to  prescribe  a  reasonable  rate  in  every  case 
of  dispute  arising  on  the  complaint  of  one  aggrieved. 
Can  more  be  asked  in  reason?  For  thereby  would  be 
given  to  the  people  all  the  benefits  of  government  own- 
ership, while  securing  them  against  many  of  its  evil 
consequences  and  all  of  its  dangers. 

I  know  of  no  matter  of  public  cowcern  more  impor- 
tant or  more  urgent  than  the  vexed  problem  we  know 
no  better  name  for  than  the  railroad  problem.  It  is 
not  a  matter  of  special  interest  to  the  few,  but  one  of 
mighty  consequences  to  the  nation.  Daniel  Webster 
said  that  the  commerce  clause  did  more  than  any  other 
in  the  constitution  to  induce  the  union  of  the  original 
states.  If  the  right  to  use  freely  the  navigable  streams, 
and  trade  with  each  other  without  unreasonable  re- 
straint, was  a  matter  of  such  moment  to  the  thirteen 
states,  who  can  measure  its  value  now  to  the  forty-five 
that  are  literally  bound  with  bands  of  steel  ? 

We  have  proceeded  to  the  point  where  it  is  our 
declared  policy  to  regulate  the  railroads;  the  founda- 
tion of  that  policy  rests  upon  the  assertion  that  the  rail- 
road is  a  public  agency,  and  its  functions  therefore  gov- 


128  LECTURES  ON  COMMERCE 

ernmental.  Advancing  with  that  poHcy,  we  either 
have  taken  or  propose  to  take  from  the  companies  those 
powers  which  every  other  industry  possesses — of  fixing 
the  price  at  which  it  will  sell  its  product,  and  to  whom, 
and  under  what  conditions  it  will  sell  at  all.  With 
this  exercise  of  great  power,  let  us  not  forget  we  have 
taken  on  great  responsibilities,  and,  in  asserting  the 
right  to  control,  we  have  incurred  the  obligation  of 
securing  to  these  public  servants  the  same  measure  of 
protection  accorded  all  others. 


TRADE  AND  INDUSTRY 


THE  STEEL  INDUSTRY. 

FRANKLIN  H.   HEAD. 

The  subject  which  has  been  assigned  me  is  the  steel 
industry.  To  deal  with  the  subject  thoroughly  in  all 
its  ramifications  would  take  a  course  of  a  dozen  lec- 
tures ;  so  I  can  only  give  you  some  of  the  general  ideas 
upon  the  subject  of  the  manufacture  of  steel,  its 
growth,  and  its  great  use  in  the  community.  I  suppose 
the  best  way  to  do  this  would  be  to  begin  at  the  begin- 
ning and  to  talk  to  you  about  steel,  at  the  very  be- 
ginning of  steel,  which  of  course  is  iron  ore.  Now, 
iron  is  something  that  is  almost  never  found  in  nature 
in  a  pure  state.  Oxygen,  which,  as  you  all  know,  is 
one  of  the  most  widely  distributed  and  active  of  the 
elements,  has  a  special  liking  for  iron,  and  it  always 
grabs  it  and  holds  to  it  with  all  its  grip,  just  as  long 
as  it  can.  In  the  process  of  smelting  iron  ore  the  two 
separate  and  the  iron  is  produced,  but  the  oxygen  does 
not  give  up  the  battle.  You  all  know  that  if  you  leave 
a  piece  of  iron  or  steel  exposed  to  the  atmosphere,  it 
gets  rusty,  as  we  call  it.  That  is  simply  the  effort  of 
the  oxygen  to  get  it  back  again  into  its  clutches.  That 
rust  on  the  oxidized  parts  of  iron  is  simply  iron  ore. 

The  first  step  from  the  ore  is  to  turn  it  into  pig  iron. 
Iron  ore  is  never  pure  oxide  of  iron;  there  is  always 
some  silica,  and  very  apt  to  be  some  phosphorus  and 
sulphur.  These  elements  all  appear  to  some  extent  in 
the  pig  iron  and  modify  it,  so  that  there  are  a  great 
many  kinds  of  pig  iron.     There  is  no  carbon  in  iron 

131 


132  LECTURES  ON  COMMERCE 

ore.  When  the  iron  ore  is  to  be  smelted,  a  layer  of 
coke  is  put  in  the  blast  furnace,  then  a  layer  of  ore, 
another  layer  of  coke,  and  another  of  ore;  and  so 
on  to  a  height  of  sixty  to  seventy  feet.  When  this  is 
subjected  to  the  heat  necessary  to  melt  the  ore,  a  cer- 
tain amount  of  the  carbon  combines  with  the  iron;  as 
a  rule,  pig  iron  as  manufactured  contains  about  3  per 
cent,  carbon.  Now,  this  carbon  is  a  most  important 
factor  in  iron  activities.  Other  elements  also  have  a 
marked  effect  on  the  quality  of  iron.  Sulphur  makes 
it  very  poor  and  brittle ;  a  good  deal  unfits  it  for  manu- 
facture. If  there  is  not  too  much  sulphur  in  the  ore, 
it  can  be  driven  off  by  roasting,  but  unless  the  sulphur 
is  expelled,  the  pig  iron  is  almost  worthless.  Silicon 
makes  it  flow  a  great  deal  more  freely  when  melted ;  it 
will  run  like  water;  and,  of  course,  that  is  what  is 
wanted  to  make  fine,  clean  castings,  where  you  want 
to  have  sharp  corners,  as,  for  instance,  in  stove  cast- 
ings. A  large  amount  of  phosphorus  spoils  steel,  so 
that  you  have  to  be  careful  not  to  get  an  iron  that  is 
too  high  in  phosphorus. 

Until  very  recently  the  next  stage  in  manufacturing 
steel  was  to  transform  the  cast  iron  into  wrought  iron. 
This  was  done  in  a  flat,  open  furnace,  over  which 
swept  a  flame  which  first  melted  the  iron  and  then, 
while  the  molten  metal  was  stirred  or  puddled,  burned 
out  the  carbon.  Other  impurities  were  squeezed  from 
the  spongy  mass  of  iron  by  rolling  or  hammering,  and 
the  product  was  wrought  iron,  used  in  an  endless 
variety  of  ways. 

The  next  form  is  the  one  we  are  to  talk  about  this 
afternoon — steel.     In  the  manufacture  of  steel  the  ob- 


THE  STEEL  INDUSTRY  133 

ject  is  to  eliminate  all  the  silicon  and  phosphorus,  and, 
in  fact,  everything  except  the  carbon,  of  which  only  a 
limited  percentage  is  retained.  The  peculiarities  of 
these  three  kinds  of  iron — cast  iron,  which  is  really  the 
same  thing  as  pig  iron,  wrought  iron,  and  steel — are 
these :  Cast  iron  will  not  bend ;  it  will  break  before  it 
will  bend.  Wrought  iron  will  bend  into  all  sorts  of 
shapes.  Steel  can  be  tempered.  It  is  tempered  by 
heating  to  a  red  heat  and  plunging  it  into  water. 
With  cast  iron  or  wrought  iron  this  process  makes  no 
difference;  but  if  you  heat  a  piece  of  steel  to  a  red  heat 
and  dip  it  in  water,  it  will  temper  it,  and  make  it  so 
hard  it  will  cut  wrought  iron  and  cast  iron,  and  even 
soft  steel.  These  are  the  distinguishing  points  about 
the  forms  of  iron. 

The  old  process  for  making  steel,  which  existed 
away  back  in  the  early  historical  period,  was,  as  has 
been  said,  to  take  pig  iron  and  work  it  into  wrought 
iron.  Then  it  would  be  iron  without  any  carbon.  The 
plan  then  was  to  get  some  carbon  into  it.  So  they 
rolled  it  into  strips  and  square  bars  and  various  shapes, 
and  put  it  into  a  box  capable  of  resisting  a  great  heat, 
and  buried  the  iron  with  charcoal  or  coal,  or  some 
form  of  carbon.  Then  they  would  cover  it  up  to  make 
it  as  near  air  tight  as  possible,  heat  it  to  a  red  heat,  and 
keep  it  there,  perhaps  for  a  week  or  ten  days  or  a  fort- 
night, depending  on  how  heavy  the  iron  was.  If  the 
air  had  got  in,  it  would  burn  it  all  up.  Keeping  the  air 
out  and  keeping  it  at  a  red  heat,  the  iron  absorbs  the 
carbon  and  becomes  steel.  This  old  way  of  making 
steel  still  prevails  in  some  few  cases  with  a  peculiar 
quality  of  steel.    That,  of  course,  made  steel  very  ex- 


134  LECTURES  ON  COMMERCE 

pensive,  so  that  it  could  not  be  used  for  common  pur- 
poses. 

The  first  man  entitled  to  eminent  credit  for  the  mod- 
ern processes  of  making  steel  is  Sir  Henry  Bessemer. 
The  Bessemer  process  revolutionized  the  steel  industry. 
By  that  time  we  had  begun  to  study  the  chemistry  of 
iron ;  before  that  it  had  been  largely  a  matter  of  guess- 
work. It  was  discovered  that  when  you  take  iron  that 
has  no  carbon,  and  put  in  anywhere  from  >^  per  cent, 
to  i>^  per  cent,  of  carbon,  it  makes  steel.  Sir  Henry 
Bessemer  conceived  the  idea  of  taking  pig  iron  and 
putting  it  in  a  large  converter,  shaped  like  a  big  vase,  a 
vessel  the  bottom  of  which  is  full  of  small  holes  through 
which  a  blast  of  air  is  forced  at  high  pressure.  When 
this  is  done,  brilliant  sparks  come  out  like  fireworks. 
Air  is  thus  forced  through  the  converter  for  from  five 
to  eight  minutes.  An  expert  can  tell  by  the  color  of 
the  flame  when  the  carbon  is  burned  out,  and  when  it 
is  burned  out  the  draft  is  stopped. 

Bessemer's  first  idea  was  not  successful.  It  was 
that  he  would  start  out  with  pig  iron,  for  example, 
with  3  per  cent,  carbon,  and  burn  out  2  per  cent,  and 
then  stop.  But  that  was  very  unsatisfactory,  because 
they  could  never  make  it  twice  alike.  It  looked  as  if 
the  process  could  not  be  a  success.  But  somebody 
working  with  Bessemer  conceived  the  idea  of  burning 
out  all  the  carbon,  then  adding  more  melted  iron  that 
contained  a  good  deal  of  carbon,  the  amount  of  carbon 
being  exactly  known.  For  example,  if  there  were  ten 
tons  of  iron  to  be  converted  into  a  steel  containing  i 
per  cent,  of  carbon,  all  the  carbon  in  the  iron  would  be 
burned  out  in  the  converter,  after  which  two  tons  of  iron 


THE  STEEL  INDUSTRY 


135 


containing  6  per  cent,  of  carbon  would  be  added,  which 
would  make  twelve  tons  of  metal  with  i  per  cent,  car- 
bon, that  is,  twelve  tons  of  steel.  In  this  way  very 
satisfactory  results  were  obtained,  and  the  Bessemer 
process  is  used  to  a  very  large  extent  today.  Most  steel 
rails  are  made  by  the  Bessemer  process,  and  it  is  a  very 
satisfactory  process,  although  it  is  not  capable  of  the 
exactness  of  some  of  the  other  methods.  But  it  is  suffi- 
ciently uniform  for  practical  purposes,  for  heavy  work. 

The  Bessemer  process  was  for  a  time  hampered  by 
the  difficulty  of  obtaining  iron  ore  practically  free  from 
phosphorus,  for  in  its  original  form  the  Bessemer 
process  did  nothing  to  eliminate  that  most  harmful 
of  elements.  A  later  improvement,  which  lined  the 
converter  with  dolomite  or  other  basic  material — hence 
giving  the  name  of  the  "basic  Bessemer  process" — 
allowed  the  process  to  be  extended  to  many  ores  which 
otherwise  would  have  been  excluded  because  of  their 
high  phosphorus.  This  process  is  of  great  importance 
in  England  and  in  our  southern  states,  where  non- 
phosphoric  ore  is  scarce.  In  this  part  of  the  country 
the  supply  of  suitable  ore  is  so  great  that  the  basic  Bes- 
semer process  is  little  used. 

There  is  another  steel  made  in  increasing  quantities, 
and  that  is  known  as  "open-hearth  steel."  There  is 
very  little  iron  destroyed ;  every  year  in  this  country  we 
make  perhaps  twelve  or  fourteen  million  tons  of  new 
iron.  That  goes  into  all  sorts  of  operations  and  shapes, 
but  does  not  disappear;  after  a  while  it  comes  back 
again  as  scrap,  as  old  railroad  rails,  for  example.  All 
sorts  of  machines,  wagon  tires,  etc.,  give  out  every 
year,  and  in  that  way  an  enormous  amount  of  steel  or 


136  LECTURES  ON  COMMERCE 

scrap  iron  comes  back  into  the  market.  The  cast  iron 
is  melted  over  again,  the  wrought  iron  is  worked  over, 
and  a  great  deal  of  use  is  found  for  the  scrap  in  making 
steel  at  the  open-hearth  furnace.  The  open-hearth  fur- 
nace is  shaped  like  a  wash-basin,  large  enough  to  hold 
about  fifty  tons  of  iron.  In  it  is  put  a  certain  amount  of 
pig  iron,  containing  a  known  percentage  of  carbon. 
Then  they  put  in  a  large  amount  of  wrought-iron 
scrap,  which  does  not  hold  any  carbon.  The  propor- 
tions of  scrap,  pig  iron,  etc.,  depend  on  what  kind  of 
steel  is  desired.  The  materials  are  melted  in  the  open- 
hearth  furnace  and  kept  there  at  a  high  temperature 
for  eight  or  ten  hours.  In  that  time  all  the  impurities 
in  the  iron  will  come  to  the  surface,  forming  a  slag,  so 
that  the  steel  made  by  the  open-hearth  furnace  is  better 
and  more  uniform  than  Bessemer  steel.  You  can  see 
that  in  sending  the  air  through  the  converter  there 
would  be  some  places  in  the  mass  that  would  not  get 
their  proportion  of  air,  while  in  other  places  the  air  in 
passing  through  the  melted  iron  would  take  up  a  little 
of  the  iron,  producing  iron  oxide;  so  that  a  careful 
analysis  of  Bessemer  steel  will  always  show  a  little  iron 
ore.  That  does  no  harm  in  making  steel  rails,  but  for 
fine  steel  it  does  not  answer  to  have  anything  like  this. 
In  the  open-hearth  furnace  it  becomes  perfectly  uni- 
form, and  the  impurities  come  to  the  surface,  pro- 
ducing a  very  fine  quality  of  steel.  The  open-hearth 
process,  on  account  of  the  enormous  mass  of  scrap 
iron  going  to  market,  is  being  used  more  and  more, 
and  it  looks  as  if  the  open-hearth  process  would  super- 
sede the  Bessemer.  It  gives  us  more  uses  for  our  scrap 
iron  and  makes  a  little  better  steel. 


THE  STEEL  INDUSTRY  137 

There  is  still  another  grade  of  steel,  which  I  will 
touch  on  briefly.  It  is  "crucible  steel" — the  finest 
made,  used  for  the  very  finest  work,  such  as  springs,  in 
which  it  is  necessary  to  have  great  uniformity  and 
great  elasticity.  This  is  made  of  the  best  wrought 
iron  with  sometimes  a  little  steel  scrap.  The  wrought- 
iron  scrap  is  cut  up  into  pieces  and  put  into  crucibles 
that  hold  about  a  hundred  pounds,  To  this  is  added 
carbon,  in  some  form,  in  sufficient  quantity  to  produce 
the  desired  quality  of  steel.  The  crucible  is  sealed 
(though  it  is  difficult  to  make  it  airtight)  and  put  into 
ovens  and  heated  so  that  the  steel  is  melted,  and  kept 
at  this  high  temperature  eight  or  ten  hours.  In  that 
way  it  becomes  perfectly  uniform,  and  if  there  are  any 
impurities  they  come  to  the  surface  and  are  taken  off. 
It  has  almost  perfect  uniformity,  and  any  desired  qual- 
ity can  be  made  with  certainty. 

I  think  I  have  given  you  now  in  a  general  way  an 
idea  about  steel  and  the  different  kinds  of  steel.  Some 
people  need  hard  steel  and  some  soft,  and  we  get  them 
in  these  various  ways.  The  whole  modern  steel  indus- 
try has  grown  out  of  the  application  of  chemistry  to  the 
mechanical  arts.  The  great  work  that  has  been  done 
in  steel  has  been  done  by  the  chemists.  If  you  go  to 
the  steel  manufacturer  and  say,  'T  want  one  thousand 
tons  of  pig  iron,  2  per  cent,  carbon,  less  than  o.  i  per 
cent,  phosphorus,  2^  per  cent,  silicon,  and  no  sulphur," 
or  any  other  formula,  he  can  make  that  for  you  with 
the  accuracy  of  a  woman  mixing  the  ingredients  for  a 
cake.  It  is  due  to  the  constant  application  of  chemistry 
to  the  mixing  of  the  ores  and  the  melting  of  the  iron. 

The  field  for  the  use  of  steel,  since  it  has  become  so 


138  LECTURES  ON  COMMERCE     • 

cheap,  has  greatly  widened.  For  instance,  lumber  is 
beginning  to  get  scarce  and  high ;  we  have  from  Chi- 
cago to  the  Rocky  Mountains  a  country  poor  in  timber, 
and  the  cost  of  fencing  that  country  with  lumber  would 
almost  be  more  than  the  farms  are  worth.  Before  they 
began  to  use  steel  so  abundantly,  they  tried  to  make 
wire  fences  out  of  iron  wire.  It  was  soft,  and  if  a  steer 
moved  against  it,  it  stretched  and  sagged  and  fell.  The 
steel  wire  is  a  great  deal  harder  and  stiffer;  and  they 
put  a  few  barbs  on  it,  to  make  the  cattle  uncomfortable, 
and  they  made  a  fence  that  has  taken  the  place  of  lum- 
ber from  here  to  the  Pacific.  The  saving  in  transporta- 
tion is  marvelous ;  for  one  carload  of  wire  fencing  will 
make  more  fence  than  a  long  train  of  lumber. 

There  have  been  two  great  advances  within  the  last 
hundred  and  fifty  years  in  the  cheap  production  of 
iron.  One  is  the  hot  blast.  In  the  old  days  cold  air 
was  used  in  the  blast  furnace.  Now  the  air  is  heated 
to  about  the  temperature  of  melted  lead  before  it  is 
admitted  to  the  furnace.  This  reduces  the  amount  of 
coal  necessary.  Forty  or  fifty  years  ago  it  took  six  or 
seven  tons  of  coal  to  make  a  ton  of  iron.  Now  it  is 
made  with  one  ton  of  coal  to  a  ton  of  iron.  Mr.  Carne- 
gie, the  most  successful  steel-maker  in  the  world,  has 
made  a  ton  of  iron  with  a  little  less  than  1,800  pounds 
of  coal.  You  can  see  what  an  enormous  change  that 
is,  to  make  a  ton  of  iron  with  one-sixth  of  the  coal  that 
was  formerly  necessary.  This  aided  in  the  production 
of  cheap  steel. 

Another  great  step  was  made  by  Siemens,  who  in- 
vented the  regenerative  furnace.  The  principle  on 
which  this  works  is  very  simple.     Suppose  a  furnace 


THE  STEEL  INDUSTRY 


139 


like  the  open-hearth  furnace.  Into  this  two  passages 
lead,  and  these  passages  are  filled  with  holes  every  six 
or  eight  inches,  with  bricks  laid  between  them ;  so  that 
about  half  the  space  is  filled  with  bricks,  between  which 
the  air  passes.  The  first  step  is  to  pass  the  gas  among 
the  bricks  and  let  it  burn  among  them,  and  in  a  little 
while  it  heats  them  to  a  white  heat — almost  to  the 
point  of  melting  iron.  When  it  gets  to  that  point,  the 
•^air  that  is  going  into  the  furnace  is  sent  through  this 
chamber  heated  almost  to  the  melting-point.  At  the 
same  time  the  set  of  bricks  in  the  other  passage  is  being 
heated.  As  soon  as  the  first  chamber  begins  to  cool, 
the  other  is  white-hot,  and  the  air  is  switched  from  one 
to  the  other,  so  that  it  always  reaches  the  furnace  at  a 
very  high  temperature,  having  taken  up  heat  from  the 
heated  bricks  through  which  it  passed.  This  invention 
has  also  enormously  reduced  the  cost  of  making  cruci- 
ble steel.  There  is  another  regenerative  furnace  de- 
scribed by  Dante,  in  his  great  work,  in  the  section 
called  purgatory;  the  two  furnaces  are  entirely  dif- 
ferent, and  should  not  be  confounded.    .  .cA^-..; 

I  have  finished  what  I  want  to  say  to  you  about  the 
manufacture  of  steel,  and  I  wash  to  say  a  few  words 
in  conclusion  in  regard  to  the  wonderful  benefit  to  the 
world  from  the  invention  of  cheap  steel.  And  for  that 
purpose  I  wish  to  quote  some  texts. 

The  first  text  is  a  sentence  from  Milton :  "Thus 
was  modern  luxury  of  commerce  born."  There 
have  been  very  few  more  pregnant  and  wonderful  sen- 
tences ever  written ;  luxury  is  born  of  commerce.  You 
have  all  read  that  at  one  time  in  England  a  new  officer 
was  appointed  whose  duty  it  was  every  day  to  go  to 


I40  LECTURES  ON  COMMERCE 

the  king's  bedroom  and  to  stir  the  straw  that  he  slept 
on,  and  see  that  there  were  no  daggers  in  it.  Straw 
probably  was  looked  upon  as  a  luxury  at  that  time.  A 
definition  of  luxury  would  perhaps  be  that  everything 
that  is  not  an  absolute  necessity  of  life  is  a  luxury. 
Everything  we  have  in  life  would  have  been  a 
luxury  one  hundred  or  two  hundred  years  ago. 
All  this  growth  of  luxury  comes  from  commerce; 
it  is  the  source  of  all  luxury  and  wealth  and  de- 
velopment. One  farmer  has  some  wheat  that  he 
cannot  use,  and  he  exchanges  it  with  the  mer- 
chant for  something  else,  and  each  makes  a  profit; 
the  farmer,  by  getting  something  he  w^ants,  and  the 
merchant  by  selling  his  goods  and  getting  a  profit  on 
them.  And  the  nation  that  is  a  great  commercial  na- 
tion is  a  wealthy  nation.  All  through  history  the 
wealthy  nations  have  been  commercial  nations.  The 
United  States  is  going  to  be  a  richer  nation  than  was 
ever  before  known.  The  developments  of  the  last  five 
or  six  years  have  shown  that  England  must  look  out 
for  her  supremacy.  It  looks  now  as  if  the  United 
States  was  going  to  be  the  prominent  industrial  na- 
tion of  the  world,  and,  if  so,  it  will  be  owing  to  com- 
merce. This  commercial  power  is  due  to  the  invention 
of  the  steel  rail.  Go  back  forty  years,  when  the  rail- 
roads all  had  iron  rails.  We  do  more  business  every 
day  now  than  in  forty  then;  but  then  the  average  life 
of  a  rail  under  moderate  usage  was  eighteen  months. 
The  whole  system  had  to  be  taken  up  and  new  rails  put 
in,  and  the  old  rails  were  sent  to  the  rolling  mill  and 
made  up  into  new  rails  again,  at  a  cost  of  about  one- 
half  of  the  original  cost  of  the  rail.    It  is  difficult  to  say 


THE  STEEL  INDUSTRY  141 

just  what  is  the  hfe  of  steel  rails  as  compared  to  iron 
rails,  but  it  is  safe  to  say  that  one  steel  rail  will  outlast 
fifteen  iron  rails. 

But  that  is  not  all;  the  rails  not  only  last  so  much 
longer,  but  cars  last  much  longer.  I  can  remember 
ver}^  well  when  if  you  were  traveling  you  could  not 
talk  with  anybody  in  the  car,  on  account  of  the  thump, 
thump  at  the  end  of  the  rail.  If  you  wanted  to  talk, 
you  had  to  shout  at  the  top  of  your  voice.  The  result 
of  the  jerking  and  pounding  w^as  the  loosening  of  the 
bolts  and  nuts  in  the  car,  and  the  cars  had  to  be  con- 
stantly taken  to  the  shops  for  repair.  Since  I  have  been 
connected  with  the  iron  industry,  it  was  considered 
a  bold  manufacturer  that  would  give  a  guarantee  that 
his  car-wheels  would  run  30,000  miles.  Today  similar 
wheels  are  guaranteed  to  run  150,000  miles. 

Let  me  give  a  couple  more  texts :  At  the  time  of 
the  World's  Fair  some  of  you  saw  the  Transportation 
Building;  and  at  the  entrance  to  that  building  there 
were  two  inscriptions,  one  on  each  side  of  the  arch. 
The  first  was  this  sentence  from  Lord  Bacon,  one  of 
the  wisest  men  of  the  time  of  Elizabeth ;  but  he  couldn't 
write  poetry,  or  plays :  "There  be  three  things  which 
make  a  nation  great  and  prosperous:  a  fertile  soil, 
busy  workshops,  and  easy  conveyance  for  men  and 
goods  from  place  to  place."  You  see  good  transporta- 
tion is  one  of  the  three  things  that  make  a  nation  great. 
The  other  text  is  from  Alacaulay :  "Of  all  inventions, 
the  alphabet  and  the  printing  press  alone  excepted, 
those  inventions  which  abridge  distance  have  done 
most  for  civilization."  You  see  that  in  both  these 
marvelous  sentences  Bacon  and  ^lacaulay  place  great 


142  LECTURES  ON  COMMERCE 

stress  upon  the  value  of  easy  transportation  from  place 
to  place — abridging  distance. 

Chicago  is  one  of  the  examples  of  the  wonderful 
growth  of  a  city  growing  out  of  the  use  of  steel  rails. 
Before  that  the  great  routes  for  settlement  lay  along 
the  edges  of  lakes  and  rivers.  The  finest  farm  in 
Illinois  that  was  twenty  miles  from  a  lake  or  river  was 
scarcely  worth  cultivating;  it  cost  so  much  to  get 
everything  to  market.  And  when  they  had  built  the 
railroads  with  iron  rails,  these  rails  wore  out  so 
fast,  and  cars  wore  out  so  fast,  that  transportation 
rates  had  to  be  very  high.  It  cost  probably  five  times 
as  much  as  it  does  now  to  move  freight.  It  is  the 
lowering  of  freight  rates  which  has  given  Chicago  its 
impetus  to  growth.  Of  course,  we  cannot  grow  unless 
the  country  grows  with  the  city.  The  country  starts 
the  wealth ;  it  starts  with  the  ground.  But  the  country 
has  to  have  some  market  for  its  product.  So  the  rail- 
roads are  what  have  built  Chicago.  I  do  not  know 
whether  you  have  looked  into  the  problem  of  how 
cheap  transportation  has  been  made  at  present.  Sta- 
tistics show  that  during  last  year  the  price  the  railroads 
received  was  a  little  under  nine-tenths  of  a  cent  for 
every  ton  per  mile.  They  would  carry  a  ton  a  mile 
for  nine-tenths  of  a  cent.  Of  course,  there  were  a  great 
many  classes  of  freight,  valuable  merchandise,  and 
bulky  goods  that  cost  several  times  that;  but,  on  the 
other  hand,  enormous  quantities  of  freight  were  car- 
ried last  year  from  here  fo  New  York  at  a  quarter  of  a 
cent  per  ton  per  mile.  The  most  that  a  farmer  would 
be  able  to  bring  to  market  on  a  wagon  would  be  about 
a  ton.     That  is  as  good  an  illustration  as  I  can  give 


THE  STEEL  INDUSTRY 


H3 


you  of  the  benefits  of  cheap  transportation,  and  this 
benefit  grows  out  of  the  invention  of  steel  rails. 

Another  thing  that  it  is  safe  to  say  is  that  for  every 
dollar  put  into  the  railroads  the  value  of  farm  property 
has  been  increased  ten  dollars. 

There  is  another  method  of  transportation,  very 
cheap,  which  is  much  used  in  some  parts  of  the  country 
— the  transportation  of  liquids  by  pipe-lines.  In  that 
way  liquids  are  transported  great  distances  at  almost 
insignificant  cost.  This  cheap  transportation  of  petro- 
leum has  been  one  of  the  foundations  of  the  fortunes 
which  have  endowed  great  universities,  and  have 
brought  within  the  reach  of  a  very  large  class  of 
people  the  advantages  of  a  higher  education. 

I  will  close  my  remarks  by  telling  you  one  incident 
which  ilustrates  how  little  people  realized  what  was 
coming  with  the  invention  of  the  steel  rail.  Twenty- 
five  or  thirty  years  ago  a  very  brilliant  essayist  lived, 
James  Parton.  Among  other  things,  he  wrote  a  series 
of  papers  about  the  great  cities  of  the  West.  He  gave 
Chicago  credit  for  being  a  wonderfully  enterprising 
town.  It  had  then  about  half  the  population  of  St. 
Louis.  St.  Louis  was  a  city  a  hundred  years  before 
anybody  lived  in  Chicago.  Parton,  when  he  came  to 
talk  about  St.  Louis,  said  it  would  always  be  the  great 
city  of  the  interior  West ;  that  Chicago  had  no  chance 
whatever  in  the  long  run,  because  she  had  to  depend 
very  largely  upon  railroads,  and  railroad  transporta- 
tion was  enormously  expensive  as  compared  with  water 
transportation;  and  so  she  could  never  have  a  large 
area  of  country  tributary  to  her.  When  a  farm  was 
nearer   the   Mississippi   than  to   Chicago,   everything 


144  LECTURES  ON  COMMERCE 

would  go  to  the  Mississippi;  and  therefore  St.  Louis 
would  always  be  greater  than  Chicago.  The  article 
made  quite  a  sensation.  St.  Louis  was  delighted,  and 
we  were  depressed,  for  it  looked  as  if  his  reasoning 
was  almost  unanswerable.  He  gave  the  figures  for  the 
actual  cost  of  railroad  transportation.  But  time  has 
made  that  wonderful  prophecy  into  something  we  can 
laugh  at.  This  development  of  Chicago  was  made  pos- 
sible by  the  wonderful  development  of  the  steel  in- 
dustry. 

I  hope  I  have  said  enough  to  make  you  feel  that  the 
steel  industry  is  a  great  industry — one  of  the  great  in- 
dustries of  the  world,  that  will  make  us  the  dominant 
commercial  power  of  the  world,  because  we  can  make 
steel  cheaper  in  this  country  than  anywhere  else.  The 
iron  and  coal  mines  of  England  have  been  worked  for 
hundreds  of  years.  In  a  large  part  of  the  mines  of 
England  it  costs  more  to  pump  the  water  out  of  the 
mines  than  it  does  to  mine  the  ore  and  put  in  on  the 
cars.  With  the  great  advantages  of  cheap  iron  and 
of  cheap  transportation,  made  possible  by  the  invention 
of  steel  rails,  we  shall  be  the  dominant  commercial 
nation  of  the  world. 


THE  HISTORY  OF  THE  ART  OF  FORGING. 

H.    F.    J.    PORTER,    BETHLEHEM    STEEL    CO.,    SOUTH 
BETHLEHEM,   PA. 

In  the  art  gallery  of  the  home,  in  Philadelphia,  of 
the  late  Joseph  Harrison  Jr.  hangs  a  large  oil  painting 
by  the  celebrated  German  artist  Schussele,  entitled 
"King  Solomon  and  the  Iron  Worker,"  in  which  is 
portrayed  an  imaginary  scene  at  a  feast  supposed  to 
have  been  given  by  King  Solomon  to  the  chief  artisans 
who  had  taken  part  in  the  construction  of  his  temple. 
At  the  right  of  the  throne  is  shown  the  seat  of  honor, 
which  the  king  had  announced  would  be  reserved  for 
the  one  who,  as  those  present  should  decide,  was  the 
master-workman  of  them  all.  To  the  surprise  of 
the  assembling  guests,  this  seat  is  found  to  have  been 
already  pre-empted  by  a  swarthy  laborer,  who  is  a 
stranger  to  those  to  whom  Solomon  appeals  for  in- 
formation regarding  him.  The  king  is  about  to  order 
the  guards  to  remove  the  unbidden  guest,  when  the 
latter  asserts  that  he  has  come  in  response  to  the  gen- 
eral invitation  extended  to  the  workmen,  and  asks 
those  who  had  just  denounced  him,  who  made  the  tools 
and  instruments  with  which  they  had  respectively  cut 
the  stone,  hewn  the  timbers,  fashioned  the  gold  and 
silver,  and  carved  the  ivory  which  together  composed 
the  structure  and  adornment  of  the  edifice.  They  one 
and  all  declare  that  "the  blacksmith"  had  supplied 
them  with  the  means  whereby  their  work  had  been 
accomplished.     Whereupon  the  repudiated  guest  an- 


146  LECTURES  ON  COMMERCE 

nounces  that  he  is  "the  blacksmith,"  and  that  by  the 
rules  of  the  contest  he  is  entitled  to  the  chair  in  which 
he  is  seated,  for  all  the  other  claimants  have  acknowl- 
edged that  without  his  work  first  theirs  could  not  have 
been  performed.  Solomon  at  once  recognizes  the  co- 
gency of  his  argument  and  awards  the  prize  to  him  as 

his  just  due. 

The  position  of  the  forgeman  among  artisans  has 
in  no  whit  changed  since  the  time  of  the  legendary 
incident  which  has  just  been  portrayed.  It  can,  in 
fact,  readily  be  maintained  that  the  art  of  forging  has 
always  held  a  dominant  position  in  the  history  of  man- 
kind. It  can  also  be  safely  stated  that  the  influence 
upon  civilization  of  the  iron  and  steel  industry,  of 
which  the  forge  has  always  been  the  leading  exponent, 
has  been  greater  than  that  of  any  other  manufactured 
product.  For,  as  in  early  times,  the  sword  and  other 
hand-weapons,  together  with  shield  and  helmet,  all 
products  of  the  forge,  determined  the  rise  and  fall  of 
nations,  so  later,  as  methods  of  forging  improved  and 
guns  and  armor-plate  modified  the  game  of  war,  those 
nations  which  possessed  the  better  implements  of  war- 
fare superseded  those  that  were  armed  in  an  inferior 
manner.  In  time  of  peace  tools  made  of  iron  and  steel 
have  ever  been  foremost  in  aiding  the  development  of 
all  those  arts  which  have  made  progress  possible. 

Research  is  unable  to  determine  regarding  the  be- 
ginning of  the  forgeman's  art.  Legend,  tradition,  and 
early  history  lead  us  to  conclude,  not  only  that  it  is 
lost  in  the  dim  and  distant  past,  but  that  it  even  as- 
sumed considerable  proportions  long  before  the  time 
when  written  records  were  made. 


HISTORY  OF  THE  ART  OF  FORGING         147 

Most  ancient  nations  attribute  the  discovery  of 
iron  to  some  god ;  the  Egy-ptians  to  Osiris,  the  Romans 
to  Vulcan,  the  Germans  to  Wodin,  the  Greeks  to  Kad- 
mos;  while  Hebrew  tradition  accredits  it  to  Tubal 
Cain,  who,  according  to  their  chronology,  lived  about 
3,000  years  before  Christ.  These  divinities,  enthroned 
in  the  clouds  or  on  the  summit  of  the  highest  mountain 
peak  in  the  land,  when  in  angry  mood  would  hurl 
thunderbolts  at  their  enemies.  Fragments  of  meteors 
occasionally  reaching  the  earth  kept  up  the  illusion. 
It  has  even  been  assumed  by  some,  from  the  fact 
that  the  Eg>'ptian  word  signifying  iron  was  benipe, 
meaning  "stone  of  the  sky,"  and  the  Greek  word 
sideros,  of  similar  import,  that  the  first  wrought-iron 
implements  were  made  from  iron  of  meteoric  origin. 
Not  many  of  these  stones,  however,  reach  the  earth, 
only  about  650  having  been  found  within  the  knowl- 
edge of  man ;  and  as  only  a  small  percentage  of  them 
fell  in  that  part  of  the  world  occupied  by  the  ancients, 
it  is  probable  that  very  few  forgings  could  have  been 
made  of  iron  from  this  source. 

When  we  consider  that  iron  and  steel  are  easily 
oxydized  by  exposure  to  the  elements,  and  that  cli- 
matic conditions  must  be  very  favorable  to  preserve 
them  for  any  great  length  of  time,  it  is  certainly 
very  remarkable  that  any  of  the  products  of  the 
forge  should  be  preserved  to  us  from  very  early 
times.  Nevertheless,  we  are  in  possession  of  numer- 
ous remains  of  forged  iron  and  steel  implements 
of  various  kinds  found  in  Europe.  Asia,  and  northern 
Africa,  under  conditions  which  preclude  all  possible 
doubt  of  their  prehistoric  origin.     Even  if,  however, 


148  LECTURES  ON  COMMERCE 

there  were  no  such  rehcs  of  this  early  craft  left  for  us 
to  see,  we  have  abundance  of  indirect,  but  absolutely 
indubitable,  proof  of  its  existence  in  the  remains  of 
prehistoric  engineering  and  architectural  works  which 
could  not  have  been  accomplished  without  the  aid  of 
iron  and  steel  tools. 

In  Egypt,  Menes,  the  oldest  known  king,  whose 
reign  began  3892  B.  C,  by  enormous  artificial  stone 
dams  changed  the  course  of  the  Nile  to  protect  the 
city  of  Memphis.  His  immediate  successors  built  the 
pyramids.  Such  gigantic  works  could  not  have  been 
executed  without  the  use  of  iron  and  steel  tools,  and  a 
numerous  population  thoroughly  skilled  in  the  me- 
chanic arts.  Mr.  J.  K.  Hill,  an  Englishman,  in  1837 
found  a  piece  of  iron  between  two  stones  while  blasting 
in  the  great  pyramids  of  Cheops.  It  was  evidently  a 
portion  of  a  tool,  and  was  apparently  lost  between  the 
joints  of  the  stones  while  building.  This  pyramid  was 
erected  about  3000  B.  C.  This  is  the  oldest  piece  of 
iron  known  to  be  in  existence,  and  is  preserved  in  the 
British  Museum. 

According  to  Chinese  legend,  iron  was  known  in 
that  country  during  the  reign  of  Hoang-ti,  who  lived 
about  the  time  of  Tubal  Cain,  2600  B,  C.  Knowledge 
of  the  working  of  this  metal,  however,  must  have  been 
antecedent  to,  or  concurrent  with,  that  of  the  lode- 
stone,  the  use  of  which  in  the  compass  has  been  traced 
to  the  reign  of  this  emperor. 

When  the  Philistines  overran  Syria,  they  carried 
the  Phoenician  iron-smiths  into  captivity  to  prevent 
their  making  arms  and  weapons  for  the  Jews.  The 
latter  were  wandering  tribes  and  possessed  no  skilled 


HISTORY  OF  THE  ART  OF  FORGING         149 

mechanics.  Tyre  and  Sidon,  the  two  principal  cities  of 
Phoenicia,  were  rich  and  prosperous,  and  contained 
many  evidences  of  the  iron-smith's  art.  David's  palace 
and  Solomon's  temple  were  designed  and  built  by 
Tyrians,  1565  B.  C. 

The  Chaldeans,  whom  Josephus  calls  the  descend- 
ants of  Tubal  Cain,  the  Assyrians,  and  the  Babylonians, 
all  were  familiar  with  iron  from  the  earliest  times. 
Preserved  in  the  British  Museum  are  implements  of 
war  and  agriculture  which  can  claim  a  date  of  manu- 
facture 1500  B.  C.  The  stones  in  the  foundations  of 
the  bridges  built  by  these  people  were  held  together 
by  iron  clamps.  The  magnitude  of  the  cut  stones 
forming  their  palaces  and  temples  shows  that  iron  and 
steel  were  known  to  them,  for  nothing  else  could  have 
cut  them.  Some  of  these  stones  exhibit  annular  bor- 
ings, testifying  to  the  use  of  an  instrument  similar  to 
our  modern  diamond  drill.  The  early  literature  of  all 
ancient  nations  speaks  of  iron  as  a  part  of  the  tribute 
paid  by  conquered  foes. 

In  India  there  are  temples  cut  from  the  solid  rock, 
and  steel  tools  which  probably  did  the  cutting  have 
been  found  in  graves  in  this  country  which  date  back 
to  1500  B.  C.  The  Rig  Veda,  of  a  little  later  date, 
speaks  of  iron.  In  the  Museum  of  the  New  York  His- 
torical Society  are  an  iron  helmet  with  chain  neck- 
guard  similar  in  design  to  those  used  in  mediaeval 
times,  also  a  breast-plate  composed  of  scales,  one  of 
which,  in  the  shape  of  a  cartouche,  has  stamped  upon 
it  the  name  of  the  Egyptian  King  Shishac,  who  invaded 
Jerusalem  971  B.  C.  These  were  taken  from  a  tomb 
during  excavations  at  Thebes  by  Dr.  Henry  Abbott, 


I50  LECTURES  ON  COMMERCE 

and  their  genuineness  has  been  verified  by  such 
archaeologists  as  Sir  Gardner  Wilkinson,  Lepsius,  and 
other  high  authorities. 

In  Persia  also  stone  ruins  testify  to  the  fact  that  iron 
was  known  at  a  very  early  date;  mention  is  made  of 
this  metal  in  the  Zend  Avesta,  written  about  i  lOO  B.  C. 

Hesiod  and  Homer,  Grecian  contemporaries,  about 
900  B.  C.  both  refer  to  the  forging  of  iron.  The  latter 
in  Book  XXIII  of  the  Iliad  speaks  of  a  huge  iron  quoit 
being  one  of  the  prizes  at  the  funeral  games  given  by 
Achilles  in  honor  of  Patroclus. 

The  author  of  Genesis,  writing  a  century  or  more 
later,  and  other  biblical  writers  of  Arabia,  Ethiopia, 
and  Mesopotamia,  refer  to  the  forging  of  iron. 

The  moist  climate  of  Mexico  and  Central  and  South 
America  is  fatal  to  the  preservation  of  iron  and  steel, 
but  enormous  statues  of  porphyry  are  frequent,  and 
these  could  not  have  been  sculptured  without  the  use 
of  steel  tools,  and  these  made  of  steel  of  most  excel- 
lent quality.  Even  our  present  knowledge  of  metal- 
lurgy is  taxed  to  its  utmost  to  obtain  tools  capable  of 
cutting  the  black  basalt  of  Nicaragua  from  which  so 
many  statues  in  that  country  are  carved.  Some  of  tliis 
work  was  cut  out  in  very  minute  detail,  as,  for  in- 
stance, the  sacrificial  stone  and  calendar  stone  of  the 
Aztecs.  Some  of  the  stone  was  soft,  and  was  prob- 
ably cut  with  instruments  of  stone  of  a  harder 
nature,  but  these  latter  must  have  been  made  by  steel 
tools,  for  nothing  else  could  have  made  them.  Such 
gigantic  works  as  the  water  conduit  in  Peru,  five  hun- 
dred miles  long,  cut  into  and  tunneled  through  the 
hardest  rock,  and  the  great  highway  built  by  the  Incas 


HISTORY  OF  THE  ART  OF  FORGING        151 

from  Quito  to  Chile,  twelve  hundred  miles  long, 
twenty-five  feet  wide,  and  cut  out  of  the  solid  trap 
porphyry,  could  not  have  been  made  by  any  other 
means  than  through  the  instrumentality  of  steel  tools. 

There  is,  however,  much  room  left  for  speculation 
as  to  the  metallurgical  methods  and  mechanical  ap- 
pliances adopted  by  primitive  man  in  the  manufacture 
of  the  early  products  of  the  forge.  It  is,  nevertheless, 
probable  that  the  earliest  methods  of  iron-smelting 
consisted  in  placing  lumps  of  ore  in  a  fire  of  wood  or 
charcoal,  located  generally  on  the  windward  side  of  a 
hill,  and  after  a  lapse  of  sufficient  time  to  permit  of 
their  more  or  less  complete  reduction,  hammering  the 
spongy  metal  thus  formed  into  the  desired  shape.  So 
that  what  is  now  known  as  the  Catalan  forge,  from 
its  use  in  Catalonia,  Spain,  in  more  modern  times  is 
but  a  comparatively  slight  modification  of  or  improve- 
ment upon  the  oldest  metallurgical  appliances  for  the 
extraction  of  iron  from  its  ore,  the  main  differences 
being  in  the  size  of  the  apparatus  and  the  use  of  an 
artificial  air  blast.  Even  the  latter  can  by  no  means 
be  considered  a  modern  appliance. 

Egyptian  sculpture  on  the  walls  of  the  tomb  of 
Thothmes  III.  at  Thebes,  of  date  1500  B.  C,  shows 
the  character  of  forge  and  bellows  used  at  that  time. 
On  the  forge  was  heaped  the  fuel,  over  which  is  a 
conical  vessel  resembling  a  modern  crucible.  The  bel- 
lows consisted  of  leather  bags  secured  and  fitted  into 
a  frame,  from  which  a  clay  pipe  extended  for  convey- 
ing the  air  into  the  fire.  They  were  worked  alternately 
by  the  feet,  the  operator  standing  upon  them  with  one 
under  each  foot.     The  air  entered  through  a  hole  on 


152  LECTURES  ON  COMMERCE 

the  top  of  each  bag,  which  was  closed  by  the  heel 
during  the  downward  pressure.  The  entrance  of  the 
air  w^as  effected  by  pulling  up  the  top  of  the  exhausted 
bag  by  a  string  held  in  the  hand.  Having  no  accurate 
knowledge  of  chemistry  or  metallurgy,  the  forging  of 
metals  was  for  centuries  in  the  state  of  an  art,  and  the 
quality  of  product  in  any  locality  was  largely  governed 
by  the  grade  of  ore  found  there,  the  purer  grade  re- 
ducing readily  to  soft  wrought  iron,  while  the  more 
impure  produced  a  harder  wrought  iron  or  inferior 
grade  of  steel.  Steel,  being  an  alloy  of  iron  with  other 
elements,  and  representing  considerable  progress  in  the 
science  of  metallurgy,  came  later  than  wrought  iron 
and  was  probably  contemporaneous  with  bronze. 
Steel  was  made  by  taking  advantage  of  the  ajffinity  of 
wrought  iron  for  carbon.  The  process  of  manufacture 
consisted  in  surrounding  wrought  iron  by  carbona- 
ceous materials  in  immediate  contact  with  it  and  sub- 
jecting them  together  to  continued  high  temperature. 
Carbon  is  absorbed  by  iron  at  the  rate  of  about  one- 
eighth  of  an  inch  in  depth  in  twenty-four  hours,  the 
more  carbon  entering  into  the  iron,  the  harder  being 
the  resultant  steel.  This  is  the  oldest  of  all  known 
methods  of  making  steel,  and  its  general  use  continued 
with  various  improvements  and  modifications  of  a 
minor  nature  until  the  middle  of  the  eighteenth  cen- 
tury. Steel  thus  made  was  called  "converted"  steel, 
from  its  method  of  conversion  from  wrought  iron. 
The  process  later  became  known  as  the  "cementation," 
or  hardening  process  of  making  steel.  It  is  true  that 
there  was  a  process  of  casting  steel  known  in  India  as 
early  as  the  fourth  century  B.  C.  and  mentioned  by 


HISTORY  OF  THE  ART  OF  FORGING        153 

Aristotle  364  B.  C.  It  consisted  in  heating  on  a  char- 
coal hearth  in  clay  crucibles,  the  covers  of  which  were 
luted  on  with  clay,  about  a  pound  of  wrought  iron  cut 
into  small  pieces  with  about  10  per  cent,  of  dried 
wood.  The  product  of  this  process  was  known  as 
wootz,  but  it  amounted  to  little  in  the  commerce  of  the 
world  and  is  mentioned  here  only  because  it  is  the 
earliest  known  process  of  making  cast  steel. 

Schliemann,  in  excavating  among  the  tombs  of 
Mycene  in  Greece,  which  was  laid  in  ruins  by  the 
Argives  in  the  fifteenth  century  B.  C,  found  thirty- 
two  feet  below  the  surface  of  the  ground  a  dagger  of 
steel  four  inches  long,  with  a  double-edged  blade  of 
arrow-form  one  and  six-tenths  inches  wide.  This  is 
the  oldest  piece  of  steel  found  up  to  the  present  time, 

Daimachus,  a  Greek  writer  at  the  time  of  Alexander 
the  Great,  B.  C.  355,  says  of  the  various  makes  of 
steel  then  in  use :  "The  Chalybdic  is  the  best  for  car- 
penter's tools;  the  Lacedaemonian  for  files,  drills, 
gravers,  and  stone  chisels.  The  Lydian  also  is  suited 
for  files  and  for  knives,  razors  and  rasps." 

Preserved  in  a  glass  case  in  Pilgrim  Hall,  at  Ply- 
mouth, IMass.,  is  the  famous  Damascus  sword  of  the 
redoubtable  Miles  Standish.  The  catalogue  says: 
''The  Arabic  inscriptions  on  the  blade  had  always  been 
a  puzzle  and  remained  undecipherable  until  Professor 
James  Rosedale,  of  Jerusalem,  with  a  troupe  of  Arabs 
from  Palestine,  visited  the  town  in  1881.  Mr.  Rose- 
dale,  being  an  excellent  linguist,  was  shown  the  sword 
and  pronounced  the  inscriptions  to  be  of  different 
dates,  one  of  them  Cufic,  very  old,  and  the  other  in 
mediaeval  Arabic.     Pie  had  no  doubt  that  the  weapon 


154  LECTURES  ON  COMMERCE 

dated  back  two  or  three  centuries  before  the  Christian 
era,  and  might  be  much  older." 

PHny,  writing  23-79  ^-  D.,  states  that  the  condi- 
tions requisite  to  obtain  the  best  temper  in  steel  had 
been  examined  into  at  that  time,  and  recommends 
water  as  best  for  quenching  certain  steels,  although 
oil  was  preferable  for  small  articles. 

The  difficulties  Avhich  Rome  encountered  in  con- 
quering Spain  were  chiefly  due  to  the  superior  arms 
of  the  Spaniards.  The  arms  of  the  Gauls  were  also 
superior  to  those  of  the  Romans.  The  Roman  arms 
were  heavy  and  of  a  poorer  quality  of  iron. 

The  Britons  knew  how  to  forge  iron  before  the 
invasion  of  Caesar  in  the  year  50  B.  C.  Caesar  speaks 
in  his  Commentaries  of  their  furnaces  for  making  iron, 
saying  that  "they  resemble  those  of  the  Gauls."  He 
also  praises  the  armament  of  their  cavalry,  consisting 
of  broad  swords  and  powerful  spears,  and  of  their 
chariots  armed  on  their  axles  with  scythes. 

The  Romans  exerted  a  decided  and  permanent  in- 
fluence on  Britain.  The  emperor  Hadrian  erected  in 
120  A.  D.  at  Bath  a  large  factory  for  the  manufacture 
of  arms  for  the  Roman  army.  These  works  were  in 
constant  activity  until  409  A.  D.,  when  the  Romans 
were  driven  out  of  Britain. 

Ancient  iron  forges  must  have  been  crude  affairs, 
and  mechanical  appliances  uncouth  and  clumsy,  yet 
the  men  who  operated  them  produced  results  that  ex- 
cite pur  wonder  at  the  present  day.  At  a  time  when 
it  is  supposed  that  but  a  pound  of  wrought  iron  could 
be  worked  at  a  charge,  we  find  that  forgings  of  con- 
siderable proportions  were  made  of  this  metal  by  tak- 


HISTORY  OF  THE  ART  OF  FORGING         155 

ing  advantage  of  its  property  of  welding.  The  most 
remarkable  instance  of  this  kind  of  work — and  it  is 
today  acknowledged  to  be  a  metallurgical  paradox — is 
a  cylindrical  wrought  iron  pillar  erected  at  the  en- 
trance of  the  principal  gate  of  the  ancient  mosque  of 
the  Kutub,  near  Delhi,  India.  An  inscription  in 
Sanskrit  assigns  its  erection  to  the  fourth  century 
A.  D.  It  is  slightly  tapered  from  sixteen  inches  diam- 
eter at  the  base  to  twelve  inches  diameter  at  the  top. 
It  is  surrounded  by  an  ornamental  capital  three  and  a 
half  feet  high.  Its  total  height  is  twenty-three  feet 
eight  inches,  and  its  estimated  weight  between  six 
and  seven  tons.  It  is  bulbed  shape  under  ground  and 
leaded  into  a  stone  foundation. 

In  the  Black  Pagoda  at  Kanaruk,  in  the  province 
of  Orissa,  are  iron  beams  twelve  feet  to  twenty-three 
feet  long,  and  eight  inches  to  twelve  inches  square  in 
section  at  the  ends.  Some  of  the  eight-inch  beams 
taper  to  eight  inches  by  eleven  inches  in  section  at 
the  center,  the  greater  depth  at  this  point  showing 
aptitude  in  correct  design  at  an  early  date. 

During  the  early  years  of  the  Christian  era  and 
down  through  the  Middle  Ages  forged  articles  of  iron 
and  steel  for  purposes  of  warfare  reached  a  high  de- 
gree of  perfection  among  those  nations  of  the  Euro- 
pean continent  who  were  foremost  in  affairs  of  the 
world.  The  smith  of  these  days  was  generally  a  serf, 
practically  a  slave  to  the  reigning  lord  or  baron.  His 
time  was  his  master's,  and  as  the  noble  robber  barons 
controlled  nearly  all  the  wealth  of  the  land  and  were 
very  proud  of  their  picturesque  strongholds,  they  could 
employ  their  smiths  for  months,  or  even  years,  on  a 


156  LECTURES  ON  COMMERCE 

single  piece  of  work  that  would  add  to  the  beauty  of 
their  domain.  The  church  vied  with  the  barons  in 
wealth,  and  spent  enormous  sums  in  the  building  of 
cathedrals  and  monastical  establishments.  Hence  we 
can  understand  how  much  wonderful  work  came  into 
existence. 

England's  iron  industry  was  of  little  consequence 
during  the  Middle  Ages.  During  the  fifteenth  cen- 
tury it  began  to  improve  and  expand.  Henry  VI.  en- 
couraged the  immigration  of  miners  from  the  con- 
tinent. Richard  HI.  prohibited  in  1483  the  importa- 
tion of  certain  articles  made  of  iron,  such  as  needles, 
hunting-knives,  scissors,  hearth-fenders,  nails,  locks, 
spurs,  stirrups,  coats  of  mail,  and  iron  candle-sticks. 
From  thence  on  the  development  of  the  iron  and  steel 
industry  was  as  rapid  in  Great  Britain  as  on  the  con- 
tinent. Not  only  w^ere  implements  of  war  of  consid- 
erable size  and  beauty  manufactured,  but  wrought  iron 
was  largely  used  in  decorative  art.  Ornamental  door- 
hinges,  gates,  fences,  balconies,  candlesticks,  lanterns, 
torchholders,  public  fountains,  etc.,  were  made  in  great 
quantities  and  elaborate  designs.  These  show,  not 
only  that  a  high  degree  of  workmanship  had  been  then 
attained,  but  that  the  genius  of  the  modern  inventor 
has  not  improved  to  any  marked  degree  upon  some 
of  the  articles  which  are  of  common  use  in  decorative 
art  now  as  they  were  then. 

The  wrought-iron  gates  which  guarded  the  en- 
trance to  the  German  exhibit  at  the  World's  Fair  at 
Chicago  were  not  more  beautiful  nor  elaborate  than 
some  of  this  mediaeval  art  work.  In  the  museum  at 
Prague  is  a  gate  which  would  puzzle  many  a  black- 
smith of  our  clay  if  he  were  asked  to  duplicate  it.     It 


HISTORY  OF  THE  ART  OF  FORGING         157 

is  a  network  of  iron  rods  interwoven  one  into  the 
other,  of  which  each  mesh  required  at  least  two  wields. 
The  meshes  are  approximately  two  and  a  half  inches 
square,  the  rods  about  five-eighths  of  an  inch  square, 
and  the  grating  over  all  about  seven  square  feet.  Thus 
we  see  that  malleability  of  iron  furnished  a  suitable 
material  for  the  handicraftsman  and  artist-smith.  For 
as  we  speak  today  of  the  artist-painter  and  artist- 
sculptor,  so  we  may  speak  of  the  artist-smith  of  the 
sixteenth  century. 

Nor  has  this  type  of  workman  vanished  altogether 
from  the  trades  at  the  present  day.  In  the  court  of 
honor  of  the  German  section  at  the  last  Paris  exposi- 
tion stood  a  notable  and  unique  group  forged  out  of 
iron  which  had  been  ordered  by  Emperor  Wilhelm  II. 
from  the  German  firm  of  Armbruster  Bros.  This 
group  consisted  of  a  magnificent  eagle  of  heroic  size, 
with  outspread  wings,  struggling  with  a  gigantic 
dragon  which  it  holds  down  by  its  talons.  The  group 
symbolizes  the  contest  of  liberty  and  truth  with  op- 
pression and  superstition. 

Such  work  represents  what  can  be  done  by  manual 
skill  and  muscular  energy.  Development  in  the  sci- 
ences of  chemistry  and  metallurgy  was  slow  and  man 
worked  laboriously  for  years  by  dint  of  acute  eye,  cun- 
ning hand,  strong  arm,  and  stalwart  courage  at  sub- 
duing the  elements.  At  this  time  all  men  were  armed, 
and  the  sword,  being  the  principal  weapon  of  defense, 
w^as  valued  highly,  and  its  manufacture  received  the 
keenest  attention.  A  good  sword  was  baptized  by  the 
priest  and  given  an  endearing  name.  Its  services  were 
extolled  in  song,  and  its  maker  ranked  high  in  the 
social  scale  and  popular  esteem. 


158  LECTURES  ON  COMMERCE 

Sword  blades  made  at  Damascus  in  Arabia,  and 
Bilboa  and  Toledo  in  Spain,  and  in  Japan,  reached  a 
point  of  excellence  which  has  never  been  surpassed. 
This  was  when  life  depended  upon  the  protection  of 
personal  armament.  These  swords  were  made  by 
hammering  together  a  little  pile  of  steel  plates  into  a 
single  flat  bar  six  or  eight  inches  long  by  a  couple  of 
inches  wide  and  perhaps  a  half  inch  thick.  This  bar 
was  then  doubled  over  end  to  end  and  hammered  out 
to  a  bar  about  the  same  size  as  before;  then  doubled 
again  and  so  on  until  it  had  been  folded  and  hammered 
out  fifteen  times.  Three  more  such  bars  were  similarly 
made,  and  the  four  bars  were  then  welded  upon  one 
another,  and  the  resulting  bar  doubled  on  itself  five 
times,  and  finally  hammered  out  to  the  required  size  and 
shape.  The  result  of  all  this  heating  and  working  was  a 
thoroughly  homogeneous  structure.  A  little  calcula- 
tion will  show  that  the  finished  sword  is  composed  of 
over  four  million  layers. 

A  beautiful  example  of  the  swordsmith's  work  is 
a  sword  engraved  by  the  celebrated  artist  Albert  Durer 
about  1495  A.  D.,  which  came  from  Nuremberg,  his 
native  town.  The  engraving  on  it  shows  St.  George 
and  St.  Christopher  on  one  side,  and  the  miraculous 
conception  of  the  Virgin,  and  St.  Theresa  with  wafer 
and  cup,  on  the  other  side.  Swords  in  Henry  VII. 's 
time  had  a  strengthening  rib  in  the  sides  which  can  be 
distinctly  seen. 

Next  to  the  sword-smith  of  importance  industrially 
and  socially  stood  the  armorer  who  made  the  helmets 
and  iron  covering  for  man  and  horse.  In  the  tenth 
century  the  armoring  of  the  whole  body  became  uni- 


HISTORY  OF  THE  ART  OF  FORGING         159 

versal;  the  thirteenth  century  witnessed  the  armoring 
of  the  horses. 

The  artistic  treatment  of  arms  and  armor  readied 
its  highest  development  during  the  sixteenth  century. 
The  perfection  in  execution  of  intricate  and  dehcate 
design  was  frequently  equal  to  that  of  the  goldsmith's 
art.  The  work  of  the  mediaeval  sword-smith  and 
armorer  are  used  as  models  today. 

A  famous  set  of  armor  was  that  of  Christian  II.  of 
Saxony,  now  in  the  museum  at  Dresden.  This  was 
made  by  Anton  Pfeffenheuser,  of  Augsburg,  in  the 
beginning  of  the  seventeenth  century,  and  cost  about 
$8,500.  The  work  of  both  the  sword-  and  armor- 
smiths  was  projected  on  a  large  scale  under  a  factory 
system,  and  the  division  of  labor  was  carried  out  with 
extreme  detail.  The  forgers,  temperers,  grinders,  etc., 
formed  their  own  guilds,  whose  members  w^ere  bound 
by  solemn  oath  not  to  leave  the  country  and  not  to 
impart  their  respective  trade  secrets  to  any  but  their 
own  sons,  or,  in  the  absence  of  the  latter,  to  their 
nearest  blood-relation. 

The  guilds  of  the  iron  and  steel  w^orkers  considered 
themselves  very  aristocratic.  No  boy  was  taken  as  an 
apprentice  who  was  not  the  legitimate  son  of  honorable 
parents.  Children  of  night  and  gate  watchmen,  bar- 
bers, musicians,  millers,  tanners,  weavers,  shepherds, 
and  tax-collectors  could  not  become  iron  and  steel 
workers,  because  their  parents  were  engaged  in  dis- 
honorable trades.  It  was  the  custom  at  the  death  of 
the  forgeman  or  smith  to  cremate  the  body  and  bury 
the  ashes  under  the  anvil  in  the  smithy. 

In  St.  Peter's  churchyard  at  St,  Albans,  England, 


i6o  LECTURES  ON  COMMERCE 

the  following  lines  appear  on  the  tomb  of  one  William 

Braithwaite,  blacksmith,  who  died  in   1757: 

My  sledge  and  hammer  lie  reclined, 
j\ty  bellows,  too,  have  lost  their  wind. 
My  fire's  extinct,  my  forge  decayed, 
And  in  the  dust  my  bones  are  laid; 
My  coal  is  spent,  my  iron's  gone, 
My  nails  are  drove,  my  work  is  done. 
My  rusted  corpse  is  here  at  rest, 
My  soul  soars,  smoke-like,  to  be  blest. 

During  the  fourteenth  and  fifteenth  centuries  these 
guilds  attained  great  importance  politically,  and  this 
importance,  although  altered  in  character,  exists  in  the 
present  time  in  Europe. 

During  the  years  from  the  third  to  the  sixth  century 
A.  D.  barbarous  nations  overwhelmed  Europe,  over- 
coming the  civilization  that  Rome  had  instituted, 
destroying  seats  of  old  industries  and  prosperous  marts 
of  trade.  But  iron  was  indispensable  for  the  carrying 
on  of  war,  and  for  this  reason  the  iron  industry  suf- 
fered least  amidst  the  general  ruin. 

War  destroys  and  at  the  same  time  is  the  incentive 
for  the  creation  of  new  things.  The  oppressed  must 
rack  their  brains  to  invent  ways  and  means  to  over- 
throw their  oppressors.  The  ruler  must  circumvent 
attempts  of  the  ruled  to  overthrow  him.  "Necessity  is 
the  mother  of  invention."  This  hostile  rivalry  breeds 
productve  genius  in  all  branches  of  industry,  and  thus 
promotes  progress  in  civilization.  As  implements  of 
war  became  more  effective,  wars  became  less  frequent 
and  of  shorter  duration. 

With  the  introduction  of  gunpowder  in  the  thir- 
teenth century  came  about  a  complete  revolution  in 
the  manufacture  of  iron.     The  old-style  weapons  dis- 


HISTORY  OF  THE  ART  OF  FORGING        i6i 

appeared  and  firearms  took  their  place.  Forgings  of 
larger  size  became  necessary.  During  the  early  part  of 
the  fourteenth  century  a  beginning  was  made  in  the 
use  of  water-power  for  driving  machinery  and  ap- 
pliances. Thus  for  a  while  this  power  was  used  to 
produce  the  blast  for  the  forge  by  means  of  a  curious 
contrivance  called  the  "trompe."  This  worked  on  the 
principle  of  a  falling  stream  of  water  entraining  air, 
which  became  imprisoned  under  pressure  in  a  box  con- 
structed with  an  opening  at  its  base  so  small  as  always 
to  hold  water  above  it.  The  air  was  drawn  off  to  the 
forge  through  a  twyer  or  pipe  suitably  arranged. 

The  Catalan  forge  of  the  thirteenth  century  re- 
ceived its  air-blast  by  this  means.  Later,  however,  as 
mechanical  ingenuity  improved,  a  water-wheel  was 
connected  with  a  shaft  w^hich  by  crude  cams  and  levers 
opened  and  closed  a  line  of  large  bellows,  which  gave 
a  continuous  blast  to  the  fire.  From  this  advance  in 
power  the  size  of  the  furnace  grew,  and  Dud  Dudley 
brought  it  to  perfection  by  the  use  of  coke  during  the 
latter  part  of  the  seventeenth  century. 

With  the  increase  in  the  facilities  for  the  produc- 
tion of  iron  the  demand  grew  in  every  direction,  and 
metallurgical  knowledge  progressed  rapidly,  with  a 
consequent  improvement  in  the  quality  of  iron  and 
steel.  The  process  of  making  steel  previously  de- 
scribed produced  what  was  known  in  the  trades  as 
"blister  steel,"  from  its  peculiar  blistered  appearance. 
When  this  steel  was  heated  and  worked  under  the 
hammer,  it  was  known  as  "shear  steel"  or  "single 
shear."  When  the  latter  was  broken  into  short 
lengths,  piled,  heated,  welded,  and  finished  under  the 


1 62  LECTURES  ON  COMMERCE 

hammer,  it  became  ''double-shear  steel."  These  steels 
got  their  names  from  the  shears  employed  for  cropping- 
woolen  cloths,  for  the  manufacture  of  which  they  were 
extensively  used. 

The  limitations  of  the  then  known  process  of  mak- 
ing "blister  steel"  by  surrounding  wrought  iron  with 
carbonaceous  materials  confined  its  product  to  pieces 
of  small  proportions.  Although  this  type  of  steel  is 
of  ancient  origin,  it  is  interesting  to  note  that  no  de- 
velopment in  its  manufacture  took  place  during  the 
time  when  it  was  the  only  process  known  of  making 
steel,  and  although  until  a  little  over  a  hundred  and  fifty 
years  ago  it  was  the  standard  steel  of  commerce,  it  has 
only  within  the  past  fifty  years  been  entirely  super- 
seded by  metal  produced  by  a  process  of  melting  in 
crucibles;  and  with  the  introduction  of  this  process, 
and  of  others  growing  from  it,  has  come  about  a  revo- 
lution in  the  steel  industry  which,  it  has  been  said,  has 
brought  about  more  development  and  advance  in  civili- 
zation than  were  caused  by  all  previous  inventions  of 
man  put  together. 

This  came  about  initially  through  the  efforts  of 
one  Daniel  Huntsman,  a  clock-maker,  in  1741,  at 
Handsworth,  near  Sheffield,  England,  in  furnaces 
which  are  still  standing,  who,  experiencing  great  diffi- 
culty in  obtaining  reliable  steel  springs  for  his  clocks, 
made  practicable  the  process  of  making  crucible  steel. 
This  process  Huntsman  tried  to  keep  secret,  but  it  was 
finally  discovered,  and  improved  upon  and  brought  to 
perfection  by  others. 

It  consisted  primarily  in  melting  "blister  steel"  in 
conjunction  with  other  necessary  elements  in  closed 


HISTORY  OF  THE  ART  OF  FORGING         163 

crucibles.  At  first  the  contents  of  the  different  cruci- 
bles Avere  not  sufficiently  uniform  in  composition  to 
allow  of  mixing,  and  the  size  of  steel  forgings  was 
limited  to  the  amount  of  steel  contained  in  one  crucible. 
Later,  as  metallurgical  knowledge  increased,  the  con- 
tents of  many  crucibles  were  poured  into  a  ladle  and 
mixed,  and  the  resultant  mixture  cast  into  molds  of 
suitable  shape,  from  which  larger  forgings  could  be 
made. 

Meanwhile,  the  science  of  chemistry  was  assuming 
practical  accuracy,  and  the  forging  industry  was  still 
further  advanced  in  1784,  when  Henry  Cort,  of  Gos- 
port,  England,  invented  the  "puddling  process"  of 
making  wrought  iron,  thus  materially  increasing  the 
output  of  this  product.  This  process  consisted  in  melt- 
ing refined  pig  iron  in  a  bath  of  cinder  on  the  sand  bot- 
tom of  a  reverberatory  furnace  by  means  of  an  oxydiz- 
ing  flame  impinging  upon  it  and  stirring  the  pool  or 
"puddle"  of  molten  metal  to  present  that  portion  which 
was  underneath  to  the  influence  of  the  flame,  and  thus 
burning  out  all  impurities  and  leaving  pure  iron.  It 
was  improved  in  1804,  by  Samuel  Baldwyn  Rogers,  of 
Naut-y-glo,  Monmouthshire,  England,  by  the  substi- 
tution of  iron  plates  for  the  sand  bottom  of  the  fur- 
nace, and  the  use  of  iron  ore  as  the  chief  source  of 
oxygen  necessary  to  decarbonize  the  molten  metal. 
Mr.  Rogers  suffered  the  fate  of  all  reformers  in  not 
having  his  improvements  appreciated  at  the  time. 
About  the  only  recognition  he  received  for  his  inven- 
tion was  the  nickname  "Old  Iron  Bottoms." 

Hot  air  for  the  furnace  blast  was  first  introduced  by 
James  Beaumont  Neilson,  of  Glasgow,  in  1828,  and 
effected  a  great  saving  over  previous  practice. 


164  LECTURES  ON  COMMERCE 

Man  is  an  imitative  animal,  his  first  tool,  the  ham- 
mer, being  probably  copied  from  the  uplifted  hand 
grasping  a  stone.  This  is  still  not  only  the  simplest, 
but  also  positively  the  most  important,  tool  in  use. 
Without  its  pioneering  blows  other  tools  could  not 
have  been  fashioned,  and  the  materials  of  which  they 
are  composed  would  have  lain  dormant  in  the  earth's 
crust  forever,  for  the  ringing  of  the  anvils  under  the 
beating  of  hammers  was  the  absolutely  essential  over- 
ture to  the  great  opera  of  the  civilization  of  the  human 
race. 

As  the  demand  for  heavier  work  increased,  the  size 
of  the  hammer  also  grew,  its  design  being  simply  a 
magnified  hand-hammer,  and  this  was  operated  by 
water-power  long  after  James  Watt  developed  the 
steam  engine.  But  steam  in  time  forced  its  way  into 
the  industry.  The  steam-hammer  in  its  modern  form 
was  the  product  of  the  fertile  brain  of  James  Nasmyth, 
in  1838,  then  of  Scotland.  He  evolved  this  tool,  prac- 
tically the  same  as  it  stands  today,  in  response  to  the 
demand  made  upon  him  to  turn  out  a  larger  forging 
than  had  ever  been  made. 

The  Great  Western  Railway  Co.  of  England  hav- 
ing already  successfully  dispatched  a  very  large 
steamer,  the  "Great  Western,"  to  New  York  from 
Bristol,  decided  to  construct  another  and  larger 
steamer,  the  "Great  Britain,"  for  the  same  line.  The 
company  was,  however,  perplexed  regarding  the  man- 
ufacture of  the  paddle-wheel  shaft,  which  was  to  be  of 
a  size  larger  than  any  heretofore  attempted.  They 
applied  to  Mr.  Nasmyth,  who  in  a  few  days  drew  the 
design  for  a  hammer  of  sufficient  capacity  to  forge  the 


/•     -  or  Tv^-- 


HISTORY  OF  THE  aIo^'WIfORGING         165 

wrought-iroii  shaft  required.  Before  the  order  for  the 
shaft  was  given,  however,  the  design  of  the  steamer 
was  changed  by  the  invention  and  introduction  of  the 
propeller  by  John  Ericson  in  1842.  The  hammer  was 
not  built,  but  the  drawing  was  completed  and  hung 
in  the  main  office  of  the  iron  works  exposed  to  the 
view  of  visitors.  Some  three  years  afterward,  during 
a  visit  of  Nasmyth  to  the  works  of  Henri  Schneider  & 
Co.,  at  Le  Creusot,  France,  he  was  surprised  at  the 
size  of  some  forgings  w^hich  he  saw  lying  about,  and 
asked  by  wdiat  means  they  had  been  made.  "By  your 
hammer,"  was  the  answer.  Further  inquiry  elicited 
the  information  that  a  year  or  more  previously  Mr. 
Schneider  and  his  superintendent  had  visited  Na- 
smyth's  works  in  England,  and,  seeing  the  design  of 
the  hammer  upon  the  office  wall  and  appreciating  its 
great  value  as  a  forging  tool,  had  on  their  return  home 
built  one  in  conformity  w^ith  it.  Mr.  Nasmyth  was 
delighted  with  the  appearance  of  his  tool  and  w^ith  the 
work  which  it  was  doing,  and  on  his  return  to  England 
proceeded  to  take  out  patents  covering  the  invention. 
These  were  issued  in  1848.  Although  facilities  for 
making  forgings  of  wrought  iron  of  considerable  size 
were  now  available,  the  difficulties  attending  the  cast- 
ing of  steel  ingots  confined  their  size  to  small  pro- 
portions. 

The  most  successful  pioneer  in  overcoming  these 
difficulties  was  Friedrich  Krupp,  of  Essen,  Germany, 
who  has  ahvays  led  all  his  competitors  in  the  manu- 
facture of  crucible-steel  forgings. 

At  the  international  exhibition  in  London  in  185 1 
this  intrepid  manufacturer  exhibited  a  cast-steel  ingot 


i66  LECTURES  ON  COMMERCE 

weighing  two  and  one-fourth  tons,  this  being  by  far 
the  largest  steel-casting  made  up  to  that  time.  He 
progressed  rapidly  after  this,  and  at  the  successive 
world's  expositions  at  Paris  in  1855,  ^"^  London  in 
1862,  and  at  Paris  again  in  1867,  and  in  Vienna  in 
1873,  he  exhibited  ingots  weighing  respectively  ten, 
twenty,  forty,  and  fifty-two  and  one-half  tons.  The 
latter,  made  by  pouring  into  one  mold  the  contents  of 
1,800  crucibles  each  containing  about  sixty  pounds  of 
molten  steel,  was  an  evidence  of  the  great  skill  attained 
by  this  manufacturer  in  the  manipulation  both  of  ma- 
terial and  men. 

About  this  time,  however,  the  enlightened  govern- 
ments of  the  world  began  to  vie  with  each  other  in 
their  power  of  destruction  in  war  by  the  use  of  larger 
guns  than  could  be  obtained  by  the  use  of  cast  iron, 
and  of  thicker  and  tougher  armament  than  could  be 
made  of  wrought  iron.  This  rivalry  stimulated  in- 
ventors to  develop  methods  of  manufacturing  steel 
in  larger  masses  and  by  cheaper  processes.  Finally  the 
invention,  in  1856,  by  Sir  Henry  Bessemer,  supple- 
mented by  the  improvements  of  Robert  Mushet,  of  the 
pneumatic  process  of  making  steel,  completed  the  revo- 
lution in  steel-making  referred  to  previously.  In  this 
process  air  is  forced  under  considerable  pressure 
through  the  bottom  of  a  vessel,  called  the  "converter," 
containing  molten  cast  iron,  until  all  of  the  carbon  and 
some  of  the  other  impurities  have  been  oxydized  out. 
Then  just  sufficient  carbon  and  other  elements  are 
added  to  make  the  steel  of  the  composition  required. 

From  this  time  on  it  was  no  longer  a  difficult  matter 
to  obtain  large  masses  of  steel,  ingots  weighing  from 


HISTORY  OF  THE  ART  OF  FORGING        167 

five  to  eight  tons  being  easily  produced.  Rolling  mills, 
which  had  been  turning  out  merchant  bar  and  rails 
made  of  wrought  iron  gradually  changed  their 
product  to  Bessemer  steel;  and  an  era  of  commercial 
enterprise  spread  its  use  over  two  continents.  Ten 
years  later,  in  1866,  Dr.  C.  W.  Siemens,  of  Germany, 
invented  his  regenerative  furnace  for  the  melting  of 
pig  iron  and  iron  ores  either  in  the  raw  state  or  in 
a  more  or  less  reduced  condition.  About  the  same 
time  Pierre  and  Emile  Martin,  of  Sireuil,  France,  pro- 
posed a  similar  method  of  melting  steel  scrap  in  a 
bath  of  pig  iron.  These  two  methods  were  later 
combined  under  the  name  of  the  "  Siemens-Martin " 
or  "open-hearth"  process.  The  hearth  of  this  fur- 
nace, being  capable  of  expansion  to  a  capacity  upward 
of  fifty  tons,  allowed  a  still  further  development  in 
the  size  of  ingots,  the  latter  becoming  practically 
unlimited  from  the  possibility  of  combining  the  con- 
tents of  several  furnaces  in  one  mold.  The  oppor- 
tunity afforded  by  this  process  of  reducing  the  cost 
of  product  by  handling  large  masses  of  material  began 
rapidly  to  force  its  use  in  place  of  the  Bessemer  pro- 
cess, with  the  probability  of  its  eventually  supplanting 
it  altogether. 

At  this  time  Friedrich  Krupp,  of  Essen,  Germany; 
Schneider  &  Co.,  Le  Creusot,  France;  the  Parkhead 
Iron  Works,  at  Glasgow,  Scotland;  in  England,  Sir 
Joseph  Whitworth  &  Co.,  at  Manchester,  and  Vickers' 
Sons  &  Co.,  Charles  Cammel  &  Co.,  John  Brown  & 
Co.,  Sir  Henry  Bessemer  &  Co.,  Thomas  Firth  &  Son, 
of  Sheffield,  and  Sir  William  Armstrong  &  Co.,  of 
Newcastle  on  Tyne,  represented  the  foremost  forges 
of  the  world. 


i68  LECTURES  ON  COMMERCE 

So  far  the  development  of  the  forging  industry  in 
Europe  only  has  been  outlined. 

In  America  the  working  of  iron  into  finished 
products  was  practically  unknown  prior  to  1752,  for 
until  then  England  had  resolutely  forbidden  the  manu- 
facture of  this  metal  in  other  than  the  form  of  pigs 
and  bars  for  shipment. 

In  1750  Governor  George  Clinton  of  New  York  re- 
ported to  the  board  of  trade  in  London,  England,  "a 
plating  forge''  with  one  tilt-hammer  as  existing,  but 
not  in  operation,  at  Wawayanda,  Orange  county,  in 
his  province  and  as  belonging  to  one  Lawrence  Scraw- 
ley,  a  blacksmith. 

In  1752  a  London  company  purchased  from  James 
Alexander,  Lord  Stirling,  some  23,000  acres  of  iron- 
ore  property  in  Orange  county,  N.  Y.,  and  established 
there  a  furnace  and  anchor  forge  under  the  name  of 
the  Stirling  Iron  Works.  This  property  in  the  course 
of  years  came  into  the  possession  of  one  Peter  Town- 
send,  who  conducted  the  business  under  the  name  of 
Noble  Townsend  &  Co.  To  these  works  on  February 
2,  1776,  repaired  Colonel  Thomas  Pickering  and  Gen- 
eral Hughes,  representing  the  revolutionary  govern- 
ment, and  made  contract  to  be  supplied  "a  chain  of 
iron  of  the  following  length  and  quality,  that  is,  in 
length  500  yards,  each  link  to  be  about  2  feet  long 
and  12  inches  wide,  of  the  best  'Stirling  iron,'  2^ 
inches  square  or  as  near  thereto  as  possible,  with  a 
swivel  in  every  100  feet,  and  a  clevis  in  every  1,000 
feet,"  and  also  to  supply  twelve  tons  of  anchors.  As 
rapidly  as  the  chain  was  completed  in  short  sections  of 
ten  links  each,  it  was  -loaded  on  ox-carts  and  hauled 


HISTORY  OF  THE  ART  OF  FORGING         169 

to  New  Windsor,  where,  at  the  Brewster  forge,  under 
the  direction  of  Captain  Thomas  Aleachim,  the  sections 
were  united;  and  the  chain  was  then  mounted  on  logs 
in  sections  of  100  feet,  floated  to  West  Point,  and  there 
united  by  swivels  and  laid  across  the  Hudson  River  to 
Constitution  Island  to  prevent  the  passage  up  the  river 
of  the  enemies'  vessels.  Some  of  the  links  of  this 
chain  are  preserved  in  the  museum  at  West  Point. 

In  1759  and  later  small  smith  forges  were  reported 
to  have  been  erected  in  New  England  for  the  purpose 
of  making  wrought  iron  anchors,  bar  iron,  axles,  etc. 
The  vast  depository  of  iron  in  Orange  county,  N.  Y., 
seems  to  have  been  well  worked  during  the  early  part 
of  the  last  century.  The  Queensboro  Furnace,  which 
continued  in  blast  until  1812,  was  well  known  in  its 
day.  The  ruins  of  the  "Augusta,"  established  by  Solo- 
mon Townsend  in  1783  in  the  south  part  of  IMonroe, 
near  Rockland  county,  are  still  an  interesting  sight  to 
passers  on  the  Erie  Railroad.  The  bloomery  is  a  stone 
building  seventy  feet  long,  in  which  were  four  fires  and 
two  hammers.  Anchors  were  made  here  weighing 
6,000  pounds.  The  "Greenwood,"  established  by  Rob- 
ert and  Peter  Townsend  in  181 1,  the  location  of  which 
is  now  a  park,  under  the  name  of  Arden,  and  the 
Southfield  Iron  Works,  established  by  Peter  and  Wil- 
liam Townsend  in  1827,  were  also  prominent.  But, 
compared  with  iron  works  in  Great  Britain  and  on  the 
continent,  these  were  small  affairs,  with  tilt-hammers 
run  by  water-power,  and  exerted  but  little  influence  on 
the  industry  of  the  country.  In  fact,  the  industrial 
condition  of  the  country  had  not  developed  sufficiently 
to  cause  any  considerable  demand  for  forgings.     Such 


I70  LECTURES  ON  COMMERCE 

few  as  were  required  were  made  abroad.  Large  shafts 
and  other  machine  parts  now  made  of  forged  iron  or 
steel  were  then  made  of  cast  iron.  In  1839,  in  order 
to  make  the  shafts  for  the  United  States  men-of-war 
"Missouri"  and  "Mississippi,"  a  seven-ton  tilt-hammer 
was  brought  from  England  and  erected  at  the  West 
Point  foundry  at  West  Point,  N.  Y.  Under  this  tool 
wrought-iron  shafts  for  these  vessels,  seventeen  inches 
in  diameter,  were  forged  successfully. 

Later  the  man  in  charge  of  this  forge  started  a  simi- 
lar establishment  at  Twenty-sixth  street  and  First 
avenue  in  New  York  city,  under  the  name  of  Tugnot, 
Dally  &  Co.,  and  in  1848  and  1849  successfully  forged 
with  a  seven-ton  tilt-hammer  wrought-iron  shafts 
seventeen  and  one-fourth  inches  in  diameter  for  the 
vessels  of  the  Collins  Line,  "Atlantic,"  "Pacific," 
"Arctic,"  and  "Baltic,"  running  to  Liverpool,  Eng- 
land. Shortly  afterward  the  "Bristol"  and  "Provi- 
dence," of  the  Fall  River  Line,  were  built,  and 
wrought-iron  shafts  twenty-three  inches  in  diameter 
were  made  for  them  at  this  forge.  From  then  on  the 
wrought-iron  forging  industry  developed,  confining 
itself,  until  recent  years,  to  the  larger  cities  of  the 
Atlantic  coast  in  New  England  and  the  middle  states. 
Then  the  development  in  maritime  interests  on  the 
Great  Lakes  brought  about  the  erection  of  several  large 
and  successful  wrought-iron  forges  in  their  vicinity. 
These  were  supplied  with  tilt-hammers  operated  by 
steam,  and  also  with  steam-hammers  of  modern  design 
of  small  size.  In  1865  the  Bessemer  process  of  making 
steel  was  first  introduced  into  this  country  by  Alex- 
ander   Lyman    Holly,    at    Wyandotte,    near    Detroit, 


HISTORY  OF  THE  ART  OF  FORGING         171 

Mich.,  and  at  the  North  Chicago  Rolling  ]\Iill,  Chi- 
cago, 111.,  and  within  the  next  ten  years  most  of  the 
large  rolling  mills  of  the  country  changed  their  product 
from  iron  to  steel. 

In  1868  Cooper,  Hewitt  &  Co.  constructed  the  first 
Siemens-AIartin  open-hearth  furnace  in  America  at 
their  rolling  mill  at  Trenton,  N.  J.  This  latter  was 
operated  only  for  a  short  time,  as  it  was  found  that 
its  product  could  not  compete  with  that  of  the  Bes- 
semer converter.  This  general  displacement  of 
wrought  iron  by  steel  was  naturally  felt  in  the  forg- 
ing industry,  and  the  forges  should  at  once  have 
equipped  themselves  as  the  rolling  mills  had  for 
working  the  new  material,  but  as  forges  equipped  to 
make  wrought-iron  forgings  were  unable  satisfactorily 
to  produce  steel-forgings  for  reasons  which  became 
apparent  after  even  a  cursory  study  of  the  subject 
special  forges  were  erected  for  the  purpose.  The  Mid- 
vale  Steel  Co.,  at  Nicetown,  a  suburb  of  Philadelphia, 
originally  established  in  1858  as  a  crucible  steel  plant 
for  making  tires,  was  converted  into  an  open-hearth 
steel  plant  in  1874,  and  took  up  the  forging  of  tires, 
axles,  guns,  and  miscellaneous  forgings,  and  was  the 
pioneer  in  this  country  in  the  manufacture  of  high- 
grade  forgings.  A  steam-hammer  of  forty  net  tons 
falling  weight  and  of  special  design  in  recent  years  has 
done  excellent  work  in  turning  out  large  forgings  of 
high  character. 

In  1883  the  United  States  government  awakened 
to  a  realization  of  the  totally  unprotected  condition  of 
its  coasts  and  the  inefficiency  of  its  navy.  When  the 
annual  appropriation  bill  was  passed,  Congress  author- 


172  LECTURES  ON  COMMERCE 

ized  the  president  to  select  from  the  army  and  navy  six 
officers  to  constitute  a  board  for  the  purpose  of  ex- 
amining and  reporting  to  Congress  which  of  the  navy 
yards  or  arsenals  owned  by  the  government  had  the 
best  location  and  was  best  adapted  for  the  establish- 
ment of  a  government  foundry,  or  what  other  location, 
if  any,  should  be  selected  for  the  erection  of  a  plant 
for  the  manufacture  of  heavy  ordnance  adapted  to 
modern  warfare  for  the  use  of  the  army  and  navy  of 
the  United  States. 

This    board    before    concluding    its    investigations 
went  abroad  and  visited  the  representative  gun  fac- 
tories in  Great  Britain  and  on  the  continent.     Its  re- 
port showed  to  the  officials  of  the  Army  and  Navy 
Departments  that  this  country  possessed  an  almost  ab- 
solute lack  of  manufacturing  facilities  capable  of  pro- 
ducing   the    necessary    equipment.      Fortunately    the 
secretary    of    the    commission,    Captain    William    H. 
Jaques,   was  able  to   obtain  a  proposition   from   Sir 
Joseph   Whitworth   &   Co.,   Limited,   of   Manchester, 
England,  to  duplicate  in  the  United  States  his  forging 
plant  for  the  manufacture  of  ordnance  and  miscellane- 
ous   forgings.      Wonderful    developments    had    been 
made  in  forging  appliances  by  Sir  Joseph  Whitworth, 
especially  through  his  hydraulic  forging-presses,  which 
he   used   altogether   in   place   of   the   steam-hammer. 
This  proposition  was  brought  to  the  attention  of  the 
Bethlehem    Iron    Co.,^    of    South    Bethlehem,    Pa., 
through  their   superintendent,   John   Fritz.     The  op- 
portunity of  being  the  first  in  the  field  with  a  forging 
plant  of  most  approved  design  and  with  a  large  amount 

^Now  the  Bethlehem  Steel  Co. 


HISTORY  OF  THE  ART  OF  FORGING         173 

of  work  practically  guaranteed  was  too  good  a  one  to 
be  lost,  and  arrangements  were  at  once  entered  into  to 
consummate  a  contract. 

Meanwhile  similar  negotiations  were  opened  with 
Schneider  et  cie.,  of  Le  Creusot,  France,  to  duplicate 
their  armor-plate  plant,  which  was  considered  the  most 
complete  of  its  kind  in  the  world.  These  negotiations 
terminated  successfully,  and  a  contract  was  made  with 
this  company  enabling  the  Bethlehem  Iron  Co.  to  pro- 
duce armor  plate  equal  to  any  made  at  that  time  for 
the  navies  of  Europe. 

The  money  value  of  these  contracts  was  very  great, 
and  has  rarely,  if  ever,  been  exceeded  by  that  of  single 
orders  given  by  a  private  firm  at  any  one  time.  The 
capacity  of  such  a  plant  was  not,  however,  deemed 
sufficient  to  satisfy  the  demand  which  it  was  antici- 
pated would  be  made  upon  it  by  the  immediate  require- 
ments of  this  country.  Consequently,  instead  of  carry- 
ing out  the  project  as  originally  projected,  it  was  de- 
termined at  the  same  time  largely  to  increase  the 
capacity  of  the  principal  tools  contained  in  each  of 
these  plants,  so  that  when  the  work  was  completed  the 
new  forge  was  easily  the  largest  in  the  world.  For 
instance,  whereas  at  the  works  of  the  Whit  worth  Co. 
the  largest  press  had  a  capacity  of  5,000  tons,  at  Beth- 
lehem a  7,000-ton  press  was  built.  At  Creusot  the 
largest  hammer  had  100  tons'  falling  weight,  and  at 
Bethlehem  the  hammer  was  built  with  a  hammer-head 
weighing  125  tons.  Since  that  time  additional  equip- 
ment has  been  added  as  necessity  demanded,  until  it 
is  at  the  present  time  by  far  the  most  complete  forge 
in  existence,  and,  owing  to  enterprise  characteristic  of 


174  LECTURES  ON  COMMERCE 

Americans,  competes  successfully  with  foreign  forges 
in  the  manufacture  of  armor  plate,  guns,  and  miscel- 
laneous forgings. 

This  having  been  the  most  recently  built  plant  of 
its  kind,  and  having  been  constructed  under  circum- 
stances which  enable  it  to  be  absolutely  modern  in  all 
particulars,  the  methods  of  manufacture  there  adopted 
are  considered  at  the  present  time  to  be  the  most  ap- 
proved and  as  representative  of  the  best  practice. 


THE    COMMERCIAL    VALUE    OF    ADVER- 
TISING. 

JOHN   LEE   MAHIN,    PRESIDENT  OF  THE   MAHIN 
ADVERTISING  CO. 

This  is  an  age  of  advertising.  Within  the  memory 
of  older  men  the  ambitious  youth  was  urged  to  enter 
the  church,  the  army,  the  law,  or  the  sciences.  To 
engage  in  trade  was  to  lower  social  tone.  Now 
business  is  generally  recognized  as  a  world-dominating 
science.  It  is  becoming  more  intricate  and  complex, 
requiring  the  highest  grade  of  intelligence. 

Commerce  in  its  elemental  form  is  little  more  than 
the  hewing  of  wood,  the  carrying  of  w^ater,  and  trading 
in  the  simple  things  necessary  to  sustain  a  low  order 
of  physical  life.  It  is  only  when  it  advances  to 
grappling  with  the  great  wheat  crop  of  the  Northwest, 
the  vast  yield  of  cotton  of  the  South,  and  the  products 
of  many  mines  and  factories,  that  it  begins  to  demand 
and  give  substantial  rewards  for  the  highest  grade  of 
brain  power  to  organize  equipment,  devise  ways  and 
means,  and  to  execute. 

War  in  its  crude  state  has  nothing  relating  to  it 
that  appeals  to  the  admiration  of  mankind.  When  it 
means  butchery,  it  is  hideous.  It  is  only  tolerable 
when  it  is  the  expression  of  the  undivided  will  of  a 
nation.  It  is  grand  when  it  is  the  determined  and 
reverent  resistance  to  tyranny  by  an  outraged  people 
battling  for  liberty.     The  skill  of  the  master-mind  in 

175 


176  LECTURES  ON  COMMERCE 

war  is  shown  in  the  incarnation  of  the  national  spirit 
and  the  expression  of  its  purpose  in  the  rapid  and 
masterly  handling  of  large  bodies  of  troops.  Alex- 
ander, Caesar,  Napoleon,  and  Grant  possessed  more 
than  physical  powers.  They  had  the  rare  quality  of 
securing  and  maintaining  the  confidence  of  the  nation 
and  the  army.  They  shifted  their  soldiers  as  the  ex- 
pert chess-player  moves  his  mimic  warriors,  and  they 
won  and  possess  the  admiration  of  mankind  because 
their  achievements  gave  them  clear  and  undisputed 
title. 

So,  too,  with  the  master-minds  that  are  now  per- 
forming the  great  industrial  achievements  in  com- 
merce. The  problems  of  production  and  distribution, 
the  elimination  of  waste  and  famine,  the  gathering 
together  of  the  products  of  the  world  and  setting  them 
in  order  for  the  easy  access  of  mankind,  present  abun- 
dant opportunity  for  the  highest  quality  of  brains. 
Commerce  in  gathering  and  distributing,  satisfied  with 
ordinary  profit  and  passively  awaiting  the  result  of  the 
capricious  tastes  of  mankind,  still  leaves  much  to  be 
desired  by  the  mind  that  has  real  creative  power. 

Commerce  in  its  higher  altitudes  is  shown  when, 
after  gathering  the  products  of  industry,  it  goes  farther 
in  changing  their  form  and  character  into  other  arti- 
cles specially  suited  for  the  higher  needs  of  men  and 
women.  Then,  by  every  possible  means  stirring  inter- 
est, creating  desire,  educating  appetite,  and  developing 
new  wants,  it  makes  a  stable  market  for  the  newly 
created  and  more  complex  commercial  products.  In 
this  way  the  standard  of  living  has  generally  been 
raised  to  include  as   necessities  articles  the  need  of 


COMMERCIAL  VALUE  OF  ADVERTISING      177 

which  was  unknown  to  the  grandparents  of  the  present 
generation. 

In  doing  this,  commerce  requires  the  wonderful  new 
power  which  the  mere  trader  never  possessed.  That 
power,  with  its  skill,  thought,  resources,  and  judgment, 
virile  energy,  largeness  of  mental  growth  and  equip- 
ment, combined  with  a  creative  force  that  accom- 
plishes things,  is  called  advertising.  I  have  previously 
defined  advertising  as 

influencing  the  minds  of  people.  It  is  making  others  think  as  you 
desire.  It  means  utilizing  all  those  forces  which  produce  impres- 
sions and  crystallize  opinions.  It  is  the  creating  of  prestige — that 
quality  which  causes  others  to  accept  a  statement  without  question. 

The  merchant  who,  through  his  idea  of  what  will 
please  the  popular  taste,  makes  his  calculations,  giving 
orders  to  manufacturers  for  six  months  to  a  year  in 
advance,  requires  great  foresight  and  intimate  knowl- 
edge of  the  fickleness  of  taste.  Yet  he  does  not 
possess  the  positive  force  that  advertising,  when 
studied  and  skilfully  employed,  will  give  him  in  his 
business.  He  only  deals  with  conditions  as  he  finds 
them.  There  is  no  effort  to  create  conditions,  but 
simply  a  shrewd  adaptation  to  existing  circumstances. 

Advertising  rests  on  the  supremacy  of  commerce. 
It  requires  stable  business  conditions  for  its  existence 
and  development.  It  is,  therefore,  a  higher  form  of 
mental  activity  than  the  successful  exercise  of  ordinary 
commercial  transactions,  because  it  goes  farther,  in 
demanding  not  only  the  power  successfully  to  cope 
with  commercial  problems,  but  an  added  ability  to 
influence  the  human  mind.  Advertising  will  produce 
active  desire  where  none,  or  at  least  only  that  of  a 


178  LECTURES  ON  COMMERCE 

latent  kind,  existed  before.  Advertising,  by  employing 
the  powerful  mental  forces  which  psychologists  call 
susfsrestion,  can  create  well-defined  habits  among  the 
people  which  an  alert  commercial  mind  will  utilize  to 
build  up  and  foster  a  business. 

A  thoroughly  equipped  advertising  man  must,  then, 
know  something  of  the  fundamental  conditions  which 
underlie  commerce.  For  instance,  credit,  being  an 
essential  feature  of  commerce,  rests  upon  absolute 
integrity  and  a  rigid  adherence  to  well-defined  prin- 
ciples. Advertising  also  without  the  fundamental  prin- 
ciples which  are  necessary  to  commerce  is  no  more 
advertising  than  is  love  the  mawkish  sentiment  which 
some  novels  depict,  the  love  which  founds  and  main- 
tains homes  where  the  wife  and  mother  are  cherished 
objects. 

There  are  people  who  call  the  displaying  of  words 
in  newspapers  advertising.  Such  individuals  would 
be  apt  to  consider  the  clerk  who  mechanically  hands 
out  a  cake  of  soap  to  a  customer,  a  merchant. 

Advertising  is  not  the  spending  of  money  in  maga- 
zine, newspaper,  street-car,  or  outdoor  space,  but  the 
accomplishment  of  a  definite  purpose,  which  is  the 
influencing  of  human  minds  and  actions.  The  many 
complex  conditions  which  enter  into  the  practical  exe- 
cution of  plans  for  advertising  can  be  only  briefly 
discussed  within  our  time  limit.  Two  sharp  distinc- 
tions, however,  appear  when  we  attempt  to  consider 
as  to  whether  an  article  may  be  profitably  advertised 
or  not. 

Raw  materials,  which  are  purchased  in  large  quan- 
tities and  enter  into  the  manufacture  of  other  articles 


COMMERCIAL  VALUE  OF  ADVERTISING      179 

in  which  the  identity  and  knowledge  of  the  source  of 
supply  of  the  component  parts  are  lost,  cannot  be 
advertised  at  the  large  expense  which  successfully 
attends  articles  of  small  retail  value  sold  in  packages 
and  capable  of  being  used  in  almost  every  family. 

Raw  materials  are  purchased  usually  by  expert  buy- 
ers, who  usually  weigh,  measure,  and  consider  after 
themselves  carefully  exploring  the  markets.  All  that 
advertising  at  its  best  can  do  here  is  to  show  how 
goods  offered  for  sale  can  be  utilized  by  the  purchaser 
to  his  profit,  and  thereby  increase  the  demand  for  a 
certain  article,  or  by  constantly  showing  the  superior 
qualities  of  the  goods  offered  secure  a  preference  at 
the  same  price  over  competing  goods  or  a  slight 
increase  in  profit.  As  in  selling  such  goods  the  number 
of  possible  customers  is  known  and  usually  easily 
accessible  to  a  salesman,  it  is  my  firm  conviction  that 
the  salesman,  when  he  embodies  knowledge,  loyalty, 
and  character,  is  himself  the  best  form  of  advertising 
where  his  services  are  available. 

There  are,  however,  salesmen  and  people  who  are 
called  salesmen.  A  man  directing  a  large  business  in 
which  certain  principles  are  rigidly  maintained  should 
see  to  it  that  his  customers  feel  the  value  of  these 
principles.  Hence,  some  form  of  concerted,  regular, 
definite  communication  in  the  form  of  printed  matter 
between  the  moving  spirit  of  the  organization  and  the 
customers  is  always  to  be  recommended. 

It  is  for  promoting  the  wider  sale  of  such  articles  as 
iron,  wheat,  corn,  raw  cotton,  and  lumber,  which  can- 
not be  advertised  like  soap,  breakfast  foods,  flour,  and 
brands  of  clothing  and  house   furnishings,   that  the 


i8o  LECTURES  ON  COMMERCE 

establishment  of  the  Department  of  Commerce  by  the 
United  States  government  should  be  earnestly  urged. 
The  man  who  presides  over  this  department  should 
be  a  deep  student  of  advertising  and  trained  in  the 
practical  expression  of  advertising  principles.  The 
census  reports  today  are  invaluable  aids  to  the  general 
advertiser,  and  the  more  extensively  the  gathering  of 
accurate  data  can  be  done  by  the  government,  the 
better  it  is  for  commerce  and  its  higher  form  of 
activity,  which  is  advertising. 

It  is  in  exploiting  and  selling  articles  of  everyday 
use  to  the  average  family  that  modern  methods  of 
advertising  have  reached  the  highest  development. 
An  able  statistician  claims  that  of  the  13,000,000  fami- 
lies in  the  United  States  but  5  per  cent,  have  incomes 
exceeding  $3,000  a  year,  counting  both  the  proceeds 
of  invested  capital  and  the  earnings  of  the  entire 
family.  When  thought  is  given  to  the  number  of 
articles  that  can  be  bought  only  by  families  having 
an  income  of  $3,000,  and  we  remember  that  only  5 
per  cent,  of  the  population  represents  possible  pur- 
chasers, the  problem  of  the  advertiser  is  so  to  spend 
the  money  that  he  has  appropriated  that  he  will  reach 
as  nearly  as  possible  only  the  class  to  which  his  goods 
will  appeal.  In  such  a  case  a  magazine  of  national 
circulation  might  have  less  waste  circulation  than  a 
local  paper  reaching  the  masses.  The  statistician  we 
have  referred  to  claims  that  over  one-third  of  all  the 
American  families  live  on  less  than  $400  a  year  and 
that  over  one-half  live  on  less  than  $600  annually. 
Thus  it  is  plain  that  an  article  which  sells  just  as 
freely  in  the  family  of  small  means  as  in  that  of  larger 


COMMERCIAL  VALUE  OF  ADVERTISING      i8i 

runs  less  danger  of  being  exploited  in  publications 
where  there  would  be  waste.  It  may  also  explain  why 
the  largest  successes  in  advertising  are  in  those  things 
of  small  retail  value  which  are  in  reach  of  the  masses. 
Desire  may  be  created  for  the  ownership  of  an  auto- 
mobile in  the  mind  of  a  man  with  a  family  of  six 
children  who  has  less  than  $600  annually  to  live  on, 
but  that  desire  is  not  likely  to  make  the  advertising 
spent  to  create  it  in  his  mind  very  profitable  to  the 
advertiser.  On  the  other  hand,  a  shoe-shining  outfit 
might  bring  good  returns  in  a  publication  read  by 
people  of  small  incomes,  which  would  most  likely 
result  in  absolute  failure  if  offered  to  the  readers  of 
magazines  like  Harper's  and  Century. 

With  22,000  publications  in  the  United  States,  and 
many  thousands  of  street  cars,  billboards,  and  dead 
walls  constantly  offered  to  the  man  who  has  money 
to  spend  in  advertising,  there  is  ample  opportunity 
for  choice  and  discrimination. 

As  many  well-dressed,  persuasive  gentlemen  are 
abroad  in  the  land  who  are  very  industrious  in 
proclaiming  the  virtues  of  the  special  advertising 
mediums  they  represent,  it  looks  as  if  some  training 
for  the  purchasing  of  space  would  be  desirable,  if 
efficient  results  were  to  follow. 

Advertising  is  too  frequently  viewed  superficially. 
Very  few  men  who  are  known  as  advertising  men 
have  ever  gone  deeper  than  to  note  certain  phenomena 
and  blindly  assert  that  history  will  repeat  itself.  An 
analysis  of  cause  and  effect,  conditions  and  the  char- 
acter of  the  forces  engaged  in  changing  them,  is  sel- 
dom attempted.     These  men  are  gamblers  in   every 


i82  LECTURES  ON  COMMERCE 

sense  of  the  word,  and  they  speak  of  advertising  effort 
as  "playing  the  game." 

Very  few  pubhshers  understand  the  value  of  the 
advertising  space  that  they  produce.  It  is  pitiful  to 
see  the  ignorance  shown  on  this  subject.  Too  many 
fail  to  see  the  professional  side  of  the  subject,  and  they 
view  the  space  as  merchandise  to  be  sold  to  whom- 
soever comes  at  whatever  price  the  market  will  permit. 
Some  advance  so  far  as  to  say  they  will  make  a  fixed 
price  in  order  to  produce  stability  of  value  and  let 
the  matter  rest  there.  A  very  few  study  out  the  possi- 
bilities of  service  that  they  are  able  to  render  others, 
and  by  systematic  effort  develop  and  maintain  an 
advertising  constituency  so  harmonious  to  the  policy 
of  the  publication  that  the  advertisements  become  of 
great  value  to  the  readers  because  they  are  adapted 
to  their  tastes,  requirements,  and  conditions.  Adver- 
tising is  not  material  substance.  It  is  service.  To 
be  sure,  space  is  sold  in  magazines,  newspapers,  street 
cars,  and  on  billboards,  but  the  true  advertiser  and 
advertising  man  never  forget  that  the  space  is  subser- 
vient to  the  service  to  be  rendered.  Ideas  are  para- 
mount. The  purpose  of  the  effort  should  be  clear  and 
definite,  and  kept  constantly  in  mind  during  the  plan- 
ning and  execution  of  the  details  by  which  it  is  to  be 
realized.  Space,  type,  words,  and  pictures  are  only 
tools  the  master-workman  uses  to  express  an  idea. 
The  finished  result  of  the  expert  work  of  the  adver- 
tiser is  not  a  material  substance  which  can  be  seen 
with  eyes  or  touched  with  hands,  but  a  definite,  posi- 
tive impression  on  many  human  minds  which  is  shown 
by  the   voluntary   purchase   of  goods   the   advertiser 


COMMERCIAL  VALUE  OF  ADVERTISING     183 

wants  to  sell.  The  mastery  of  mind  over  mind  is  the 
real  test  of  greatness.  The  power  of  Alexander, 
Julius  Caesar,  Washington,  and  Napoleon  was  not 
physical.  It  was  the  rare  quality  of  causing  others 
to  think  as  they  desired.  No  man  ever  succeeded  as 
an  advertiser  that  did  not  possess  this  faculty.  No 
man  was  ever  a  success  in  anything  without  a  fair 
degree  of  it.  The  field  for  good  men  in  advertising 
is  wide.  There  is  little  danger  of  it  being  overdone. 
There  is  room  at  the  top. 

We  read  that  Benjamin  Franklin's  prospective 
mother-in-law  objected  to  him  on  the  ground  that  he 
was  engaged  in  a  business  already  overdone.  He  had 
just  started  to  publish  a  newspaper  when  there  were 
three  others  established  in  this  country. 

The  last  issue  of  the  American  Nezvspapcr  Directory 
shows  21,844  publications  regularly  issued  in  the 
United  States. 

Reading  matter  is  certainly  mental  food.  It  affects 
the  mind  only  except  as  some  of  it  occasionally  con- 
tributes to  starting  the  kitchen  fire.  There  may  be 
much  that  is  unwholesome  and  ill-seasoned  in  what 
the  printing  press  lays  before  us,  but  it  is  intended 
for  mind  utilization  only.  The  development  of  adver- 
tising is  closely  interwoven  with  the  expansion  of  the 
printing  business.  The  large  daily  papers  have  type- 
setting machines  and  perfecting  presses  which  are 
expressions  of  the  fierce  desire  for  speed.  The  great 
magazines  and  the  magnificently  illustrated  catalogues 
have  been  evolved  on  the  line  of  more  delicate  effects 
in  typographic  impression  and  more  minute  and  artis- 
tic detail  in  illustrative  reproduction. 


1 84  LECTURES  ON  COMMERCE 

Color  work  has  made  wonderful  progress,  and  scien- 
tific men  are  already  beginning  to  explain  why  colors 
in  certain  combinations  seem  to  have  greater  powers 
of  attraction  than  others. 

Right  here  it  might  be  wise  to  say  that  advertising 
does  not  consist  in  merely  attracting  attention.  A 
man  could  go  to  his  business  with  a  dress  suit  and  a 
red  necktie.  He  would  sacrifice  the  potent  force  of 
dignity.  A  bull  fight  on  the  campus  of  this  university, 
if  authorized  and  conducted  by  President  Harper, 
would  give  him  and  this  great  institution  more  free 
publicity  all  over  the  world  than  any  great  scientific 
discovery  that  could  be  announced. 

Advertising  must  secure  attention,  but  it  must  come 
from  the  right  kind  of  people  and  in  a  way  that  pro- 
duces respect  for  the  article  advertised.  Hence,  all 
possible  knowledge  of  the  human  mind,  its  mysterious 
and  subtle  manifestations,  and  the  influence  of  affirma- 
tion, argument,  color,  suggestion,  or  an  appeal  to  the 
imagination,  must  enter  into  the  deliberations  of  the 
mind  that  plans  and  executes  an  advertising  campaign. 

Let  us  imagine  for  an  instant  that  a  man  had  never 
shaved  himself  or  knew  that  such  a  thing  could  be 
done.  After  seeing  a  razor  skilfully  manipulated, 
suppose  he  should  try  it  on  himself  with  one  of  those 
so-called  knives  his  wife  keeps  in  the  kitchen?  Would 
he  be  competent  to  say  that  his  face  was  different 
and  that  shaving  was  not  adapted  to  his  peculiar 
condition  ? 

These  illustrations  are  no  more  overdrawn  than  the 
notions  some  people  have  about  advertising.  This,  of 
course,  is  due  to  a  lack  of  accurate  observation  and 


COMMERCIAL  VALUE  OF  ADVERTISING     185 

anaylsis  of  the  fundamental  principles  on  which  its 
operations  are  conducted. 

Notwithstanding  the  wide  prevalence  of  mistaken 
ideas  about  advertising  and  its  true  functions,  the 
money  spent  amounts  to  millions  annually,  and  much 
of  it  is  spent  with  intelligence  and  great  effectiveness, 
though  I  believe  much  the  larger  portion  is  wasted  in 
a  desultory  manner  along  lines  that  even  a  gambler 
would  despise  for  their  lack  of  justification. 

The  men  who  have  made  a  success  of  advertising 
have  not  looked  at  it  as  a  matter  of  luck.  They  have 
believed  its  great  powers  were  subject  to  immutable 
laws  and  have  sought  to  become  familiar  with  them. 
Illustrations,  words,  and  space,  and  the  cost  of  the 
same,  while  carefully  weighed  and  considered,  have 
been  subordinated  to  the  main  purpose  of  producing 
a  mental  impression,  I  can  imagine  Millet,  the 
painter  of  "The  Angelus,"  testing  colors  and  canvas, 
and  demanding  only  the  best  the  market  could  afford 
regardless  of  price,  but  never  asking  the  dealers  in 
artists'  materials  to  submit  bids.  The  best  service 
and  the  best  articles  cannot  be  secured  by  asking  for 
competitive  offers  in  price. 

The  place  of  advertising  in  modern  business  is 
secure.  It  occupies  the  most  important  position,  not- 
withstanding its  true  functions  are  so  largely  mis- 
understood. The  merchant  princes,  the  monarchs  of 
manufacturing,  and  the  generals  of  distribution  have 
found  advertising  absolutely  essential  to  the  upbuild- 
ing and  conduct  of  their  enterprises. 

One  very  interesting  fact  is  the  clear  distinction  be- 
tween the  effect  of  advertising  on  the  final  purchaser 


i86  LECTURES  ON  COMMERCE 

or  consumer  and  the  intermediate  handler  of  the  prod- 
uct. The  man  who  buys  a  hat  to  wear  himself  is  in 
a  radically  different  position  from  the  man  who  buys 
it  to  sell  again. 

The  latter  is  the  dealer,  and,  strange  as  it  may  seem, 
the  most  common  error  that  manufacturers  make  is 
in  regarding  the  dealer  as  a  consumer.  The  dealer 
buys  a  hat  to  make  a  profit  in  selling  it  again.  Two 
considerations  appeal  to  him — price  and  a  quality  for 
which  he  can  establish  a  permanent  trade.  Style  is 
valuable  to  the  dealer  only  as  it  is  valued  by  the  man 
who  buys  from  him.  Shape,  color,  trimmings  are  not 
in  any  sense  a  matter  of  the  dealer's  individual  tastes, 
if  his  customers — the  consumers — have  well-defined 
ideas  on  these  subjects  themselves.  The  considera- 
tions which  cause  the  purchase  of  a  hat  by  the  man 
who  wears  it  spring  from  radically  different  motives. 
He  may  think  he  buys  a  hat  because  he  has  to  do  it. 
The  habit  of  hat-buying  is  evidence  of  some  form  of 
skilful  advertising  years  ago.  A  really  independent 
man  would  wear  a  hood  or  a  scarf,  or  let  his  hair  grow 
and  wear  nothing,  if  he  were  not  a  slave  to  other  men's 
ideas  in  putting  on  and  wearing  what  others  have 
thought  out  to  be  best  for  him,  and  incidentally,  per- 
haps, best  for  them,  because  they  were  in  a  better 
position  to  supply  the  demand  they  thus  created.  To 
be  sure,  a  buyer  may  exercise  some  selection  in  color, 
shape,  and  style,  but  his  selection  is  usually  confined 
to  what  is  placed  before  him.  He  may  buy  a  broad- 
brimmed  soft  hat  because  he  admires  a  certain  presi- 
dential candidate;  he  may  buy  a  hat  to  please  a 
woman;  he  may  pick  one  to  minister  to  his  own  van- 


COMMERCIAL  VALUE  OF  ADVERTISING      187 

ity.  At  any  rate,  his  selection  depends  upon  some- 
thing which  another  has  unconsciously  forced  on  his 
mind,  and  it  is  in  the  study,  comprehension,  and  utili- 
zation of  those  things  which  cause  such  impressions 
that  the  manufacturer  of  a  hat  should  concern  himself 
as  soon  as  he  has  mastered  the  mechanical  problems 
of  his  factory. 

Advertising  thus  gives  a  manufacturer  the  power  to 
produce  trade  for  the  thing  he  is  best  equipped  to  pro- 
duce. It  eliminates  competition.  It  creates,  forces, 
builds.  It  makes  things  happen.  Advertising  is  so 
many-sided  in  its  character  that  it  deserves  attention 
in  connection  with  every  department  of  a  business 
organization.  As  already  stated,  it  will  produce 
desire;  gratified  desire  produces  habit,  and  habit  pro- 
duces business.  But  advertising  does  more  than  this. 
It  makes  sales.  Xot  in  the  same  sense  as  the  salesman, 
for  the  brainy  salesman  is  only  given  larger  fields  for 
usefulness  and  greater  emoluments  for  his  efforts 
when  he  co-operates  with  advertising.  But  advertis- 
ing produces  a  demand  for  an  article  which  the  dealer 
is  compelled  to  notice  and  which  he  supplies  as  he 
does  sugar,  coffee,  cotton,  cloth,  or  any  other  staple. 

In  making  articles  sell  as  the  result  of  a  demand 
created  by  the  advertiser's  efforts,  advertising  elimi- 
nates competition  to  a  large  degree,  increases  profits, 
makes  the  good-will  or  intangible  quality  of  a  business 
or  brand  name  largely  enhanced  in  value.  In  this 
way  advertising  produces  value,  and  many  instances 
could  be  cited  proving  that  the  intelligent  expenditure 
of  money  in  advertising  was  an  investment  as  much 
as  the  investment  of  more  capital  in  tangible  things 


1 88  LECTURES  ON  COMMERCE 

like  buildings  and  machinery.  Take  the  Royal  Baking 
Powder  Co.  The  capital  of  this  concern,  to  a  large 
degree,  is  represented  by  its  good-will  and  the  prestige 
due  to  the  exclusive  right  to  use  the  name  "Royal" 
In  making  baking  powder.  Take  "Gold  Dust  Washing 
Powder"  as  an  example.  If  everything  in  shape  of 
factory,  raw  material,  and  everything  else  which  would 
be  called  tangible  property  were  swept  away,  the  right 
to  make  and  sell  Gold  Dust  Washing  Powder  would 
represent  a  very  large  sum.  In  this  way  money  spent 
in  advertising  is  invested  just  as  much  as  if  put  into 
buildings,  live  stock,  or  produce,  which  need  constant 
repair  and  attention  to  keep  them  in  proper  condition 
and  their  value  from  deteriorating. 

There  are  several  other  points  where  advertising 
comes  in  to  save  expense.  A  man  who  does  his  busi- 
ness on  the  basis  of  advertising  can  employ  less  capi- 
tal and  thereby  save  on  his  interest  charges.  This  is 
because  business  based  on  advertising  is  produced  more 
by  the  creating  of  business  conditions  than  by  adapt- 
ing- one's  affairs  to  the  same.  Collections  can  be  made 
closer  and  much  less  capital  used,  because  the  very 
nature  of  the  business  puts  the  purchaser  in  the  posi- 
tion of  having  sought  the  goods  when  he  has  read 
and  been  influenced  by  the  advertising. 

Great  retailers  have  found  that  advertising  will 
bring  purchasers  to  their  stores  earlier  in  the  day  than 
they  would  otherwise  come.  Rent,  clerk  hire,  insur- 
ance, and  all  the  other  fixed  expenses  of  a  business 
must  be  met  before  there  are  any  profits.  If  a  store  is 
rushed  with  customers  from  ii  a.m.  to  5  p.m.,  there 
are  really  only  six  hours  to  do  business.     As  advertis- 


COMMERCIAL  VALUE  OF  ADVERTISING     189 

ing  of  bargains  and  special  sales  will  bring  in  cus- 
tomers two  and  sometimes  three  hours  earlier,  the 
fixed  expenses  for  those  hours  are  not  increased.  In 
this  way  advertising  saves  rent,  clerk  hire,  insurance, 
and  reduces  the  fixed  expenses,  to  say  nothing  of 
giving  the  master-mind  who  pilots  the  big  modern 
department  store  through  the  seas  of  business  a  close 
insight  into  the  tastes,  habits,  and  desires  of  the  people. 

Advertising  also  has  an  educational  value  which 
enables  the  seller  of  merchandise  to  convince  people 
what  they  want  to  buy  before  they  come  to  the  store. 
In  this  way  sales  are  greatly  facilitated.  One  clerk 
is  able  to  wait  on  more  customers,  and  the  ratio  of 
expense  is  thus  lowered. 

There  are  many  great  stores  which  have  acquired 
the  confidence  of  large  numbers  of  people  in  their 
newspaper  announcements.  In  this  way  the  tastes  of 
these  regular  customers  are  molded  to  a  considerable 
degree,  and  the  buyers  for  this  store  are  enabled  to 
secure  lower  prices  by  placing  larger  orders,  as  they 
have  the  assurance  that  the  advertising  of  the  house 
will  be  able  to  create  a  demand  for  the  large  purchases 
they  have  made. 

A  shrewd  advertising  man  in  a  large  retail  store  is 
able  in  time  to  divide  the  customers  of  the  house  into 
several  classes  and  influence  all  of  them  by  advertising. 

A  certain  number  want  high  class  and  exclusiveness. 
They  are  won  and  held  by  a  studied  catering  to  their 
wishes.  Another  class  will  spend  its  surplus  cash  for 
bargains,  no  matter  what  kind  they  are.  These  are 
known  and  the  best  method  of  reaching  them  tested, 
and  the  house  is  thus  able  to  overcome  errors  of  a  too 


190  LECTURES  ON  COMMERCE 

sanguine  buyer  and  to  take  advantage  of  a  manufac- 
turer's misfortune. 

A  shrewd  advertiser  at  Christmas  time  can  influence 
the  people  who  want  quahty  to  spend  more  money  by 
suggestive  advertising.  Many  a  man  who  has  decided' 
to  spend  ten  dollars  on  his  wife's  present  has  been 
influenced  to  spend  twenty-five,  after  having  it  im- 
pressed on  his  mind  that  about  that  amount  was  neces- 
sary to  get  those  things  which  he  knew  a  nice  little 
woman  really  wanted.  A  man  who  regards  a  piece 
of  jewelry  as  a  luxury  and  an  extravagance  reads  a 
suggestive  advertisement  and  buys  an  expensive  ring 
as  an  expression  of  sentiment  which  would  be  cher- 
ished for  the  sake  of  the  sentiment,  and  thus  by  its 
constant  suggestions  keep  alive  and  honor  a  reciprocal 
feeling. 

Consideration  of  the  media  used  by  the  American 
advertiser  can  only  be  given  in  a  general  way.  The 
great  family  journals  of  national  circulation,  like  the 
Ladies'  Home  Journal,  Delineator,  and  Youths'  Com- 
panion, are  practically  home  publications.  They  deal 
in  a  practical  manner  with  those  problems  which  come 
up  constantly  in  the  average  home.  They  go  a  long 
way  toward  answering  the  ever-recurrent  problems : 
What  shall  I  eat?  What  shall  I  wear?  How  shall  I 
furnish  my  home?  How  shall  I  raise  my  children? 
They  mold  thought.  They  create  habit.  These  three 
publications  are  also  worthy  of  particular  attention  in 
the  manner  in  which  their  advertising  columns  are 
handled.  No  advertisements  of  liquors,  tobacco,  or 
things  of  a  questionable  nature  are  admitted  to  their 
columns.     The  Youths'  Companion  does  not  draw  the 


COMMERCIAL  VALUE  OF  ADVERTISING     191 

line  quite  so  closely  as  the  Ladies'  Home  Journal  and 
Delineator  on  proprietary  remedies,  but  the  exceptions 
are  very  few  and  confined  to  old-time  family  prepara- 
tions. The  Ladies'  Home  Journal  and  Delineator 
refuse  all  medical,  remedial,  or  curative  announce- 
ments, and  also  all  advertisements  of  investments. 
All  these  publications  insist  on  knowing  what  the 
advertiser  offers  to  their  readers,  and  if  he  is,  as  far 
as  can  be  learned,  fully  able  to  carry  out  his  offers  made 
in  his  advertising.  In  the  event  of  complaint  of  unfair 
dealing  being  made  by  any  subscriber,  the  matter  is 
promptly  investigated,  and  if  the  advertiser  is  in  the 
wrong  he  is  denied  further  use  of  the  columns.  All 
three  publications  have  circulations  exceeding  half  a 
million  copies.  One  inch  space  for  one  issue  costs  $84 
in  the  Ladies'  Home  Journal,  $42  in  the  Delineator, 
and  $56  in  the  Youths'  Companion.  Even  at  these 
prices,  which  seem  extravagant  to  the  uninitiated,  it 
only  costs  one  cent  to  place  this  one-inch  advertise- 
ment in  these  three  publications  in  the  homes  of  112 
families,  and,  as  it  is  well  known  that  these  publica- 
tions are  read  by  at  least  five  persons  to  each  copy, 
560  readers  are  reached  with  each  one-inch  advertise- 
ment at  the  cost  of  one  cent.  Comparison  of  cost 
with  circularizing  or  personal  soliciting  is  significant 
and  instructive.  I  might  say  that  I  have  known  one 
Chicago  advertiser  to  receive  over  1,000  letters  in  one 
day  from  an  inch  advertisement  in  one  of  these  publi- 
cations. 

At  this  point  I  should  like  to  emphasize  the  state- 
ment that  because  the  Ladies'  Home  Journal  and 
Delineator  refuse  both  proprietary  remedies  and  invest- 


192  LECTURES  ON  COMMERCE 

ment  advertising,  this  action  is  not  a  reflection  on 
either  proprietary  medicines  or  investments  as  a 
business.  The  explanation  given  by  the  advertising 
managers  of  these  pubHcations,  and  other  pubHshers 
who  refuse  certain  classes  of  advertising,  is  that  it  is 
done  in  order  to  keep  their  columns  filled  with 
announcements  that  contribute  to  holding  the  interest 
of  subscribers. 

That  advertisements  have  this  power  is  shown  by 
the  generally  admitted  fact  that  the  loss  of  the  full- 
page  Wanamaker  announcement  by  a  certain  Phila- 
delphia newspaper  not  long  ago  resulted  in  a  dropping 
off  of  about  20,000  daily  circulation.  Proprietary 
medicines  are  better  adapted  for  exploitation  in  daily 
papers  and  media  that  reach  the  masses.  There  is  just 
as  much  difference  in  the  quality  of  proprietary  med- 
icine advertisements  as  in  those  of  investments.  There 
are  some  publications  who  refuse  both  on  the  ground 
that  they  have  not  the  time  to  make  the  constant  dis- 
crimination necessary.  There  are  others  who  accept 
everything  that  comes  along,  and  hence  their  columns 
are  shunned  by  the  better  class  of  proprietary  medicine 
and  investment  advertisers.  The  best  method  for  a 
publisher  to  pursue — and  the  one  which  is  most  gen- 
erally adopted  by  those  whose  service  is  suitable  for 
either  investments  or  proprietary  medicines — is  to  dis- 
criminate. The  integrity,  business  ability,  and  com- 
mercial honor  of  many  of  the  men  engaged  in  the 
medicine  business  is  fully  as  high  as  that  of  the  men 
who  make  the  words  "banker"  and  "broker"  honorable 
in  all  of  the  trustworthiness  that  is  attached  to  the 
same. 


COMMERCIAL  VALUE  OF  ADVERTISING     193 

The  fact  that  men  who  want  to  fleece  their  fellow- 
men  call  themselves  bankers  and  brokers  is  really,  on 
second  thought,  only  a  compliment  to  the  business. 
That  other  men  seek  to  impose  on  their  fellow-men 
by  offering  them  remedies  that  are  worse  than  useless 
is  proof  of  the  efficiency  of  engaging  in  the  business 
of  selling  curative  remedies. 

The  men  who  sell  investments  and  proprietary  med- 
icines with  honor  are  those*  who  are  faithful  to  the 
trust  that  the  public  places  in  their  hands,  and,  while 
it  is  necessary  for  men  in  both  of  these  lines  to  estab- 
lish their  integrity  and  efficiency  at  a  very  great  cost 
of  energy,  tinie,  and  effort,  the  reward  that  comes 
to  them  when  once  the  goal  of  success  is  reached  is 
such  as  to  justify  the  attempt  on  the  part  of  the  most 
courageous  and  able  spirits. 

The  great  magazines  like  Harper's,  Century,  Scrih- 
ner's,  World's  Work,  Reviezv  of  Reviezvs,  Miin- 
sey's,  and  McClure's  possess  peculiar  influence.  They 
are  read  by  people  who  expect  to  find  in  their  pages 
new  lines  of  thought  and  the  records  of  the  world's 
achievement  in  art  and  literature.  The  money  spent 
in  the  preparation  of  the  art  and  literary  matter  in 
these  magazines  is  enormous,  but  it  is  exceeded  largely 
by  that  spent  for  the  same  kind  of  talent  in  preparing 
the  advertising  pages.  The  life  of  the  magazine  is 
long  and  its  advertising  pages  have  far-reaching 
influence. 

The  weeklies  lie  midway  between  the  monthly  mag- 
azine and  the  daily  newspaper.  They  have  some  of 
the  deliberative  and  crystallized  character  of  the 
monthly,  with  the  actual  news  feature  of  the  daily. 


194  LECTURES  ON  COMMERCE 

The  weekly  is  usually  specialized  into  such  divisions 
as  agricultural,  religious,  society,  political,  and  juve- 
nile. The  news  feature  is  usually  prominent,  but  it 
is  news  of  a  much  more  limited  scope  than  the  daily. 
The  comments  and  special  articles  are  generally 
directed  to  the  particular  class  to  which  the  news 
features  most  strongly  appeal. 

The  daily  paper  is  the  record  of  the  day's  events. 
Everything  that  happens  today  that  can  have  any 
human  interest  to  its  readers  is  recorded.  Accuracy  is 
sacrificed  to  speed.  Gossip,  rumor,  opinions,  impulse, 
and  sentiment  predominate  over  reflection,  analysis, 
and  patient  research.  The  daily  paper  ^ves  but  a  day. 
Where  is  yesterday's  daily?  Anything  of  paramount 
value  finds  its  way  eventually  into  the  specialized 
weeklies  or  great  magazines,  and  finally  into  historical 
or  cyclopedic  records.  The  daily  newspaper  is  as 
essential  to  our  business  and  social  life  as  the  air  we 
breathe  or  the  food  we  eat  to  our  physical  natures. 

The  street  car  has  become  a  powerful  factor  in 
advertising.  Our  most  important  commercial  thor- 
oughfares are  those  crowded  with  street  cars.  The 
more  business,  the  more  street  cars.  The  cards  give 
opportunity  for  display  of  color,  and  attract  the  eye 
and  impress  the  mind,  and  eventually  create  desire  to 
test  the  articles  advertised. 

Painted  signboards  and  billboards,  on  which  post- 
ers are  placed,  have  great  force.  The  amount  of 
money  invested  in  billboards,  the  amount  paid  out  in 
labor  to  painters,  billposters,  and  for  paint,  paper,  and 
paste,  amounts  to  several  millions  annually.  I  am  not 
one  of  those  who  think  the  billboard  and  outdoor  sign 


COMMERCIAL  VALUE  OF  ADVERTISING     195 

are  offensive.  I  am  ready  to  prove  that  the  billposters 
and  sign-painters  would  refuse  to  put  up  many  of  the 
advertisements  that  regularly  appear  in  the  columns 
of  the  daily  papers  that  find  fault  with  outdoor  dis- 
plays. 

If  the  encouragement  of  art  is  worthy,  then  com- 
mend the  painted  bulletin  and  the  billboard.  They 
give  employment  to  artists,  and  the  demand  for  better 
grades  of  art  work  is  growing  among  users  of  posters 
just  as  fast  as  among  magazine  or  newspaper  adver- 
tisers. 

The  business  of  buying  and  selling  space  in  news- 
papers, magazines,  street  cars,  posters,  and  signs  has 
grown  to  enormous  proportions.  The  men  engaged 
in  it,  both  as  buyers  and  sellers,  are  remunerated  more 
liberally  than  I  believe  the  same  grade  of  talent  secures 
in  law,  medicine,  or  any  of  the  other  professions. 
The  tone  of  the  advertising  business  is  higher  than 
ten  years  ago.  The  men  of  dignity,  high  character, 
and  wide  knowledge  are  rapidly  forging  to  the  front. 
The  most  successful  sellers  of  space  are  those  who  seek 
only  those  advertisers  who  have  a  proposition  pecul- 
iarly adapted  to  the  space  to  be  sold.  The  best  sellers 
of  space  refuse  to  sell  where  there  will  be  certain  dis- 
satisfaction on  the  part  of  the  buyer.  Hence,  the 
advertising  salesman,  to  be  really  successful,  must 
possess,  in  addition  to  selling  ability,  that  of  knowing 
what  the  buyer  can  and  will  do  with  his  purchase. 
The  men  who  can  do  this  are  so  scarce  that  the  demand 
is  greater  than  the  supply,  and  the  young  man  who 
gives  indication  of  this  peculiar  ability  is  so  quickly 
snapped  up  and  so  eagerly  sought  for  that  he  posi- 


196  LECTURES  ON  COMMERCE 

tively  requires  the  rare  quality  of  balance  and  ability 
to  bear  prosperity  to  make  him  permanently  success- 
ful. Advertising  embodies  all  the  pleasures  of  the 
chase  with  the  creative  delights  of  seeing  ideas  mate- 
rialize. It  is  an  intoxicating  business.  A  clear  head, 
rigid  adherence  to  sound  principles,  and  an  ability  to 
see  things  as  they  are,  and  not  become  led  away  by 
the  seductions  of  one's  own  egotism  or  the  excitement 
of  a  gay  social  life,  must  be  possessed  by  all  who 
would  win  and  hold  the  honors  so  lavishly  given  to 
those  who  succeed  in  advertising. 

The  bewildering  number  of  opportunities  to  spend 
money  in  advertising,  the  very  few  sellers  of  space 
who  have  discrimination  and  honesty  combined,  and 
the  large  number  who  are  counterfeits  have  made  the 
entering  into  successful  advertising  about  as  difficult 
a  thing  as  can  be  imagined. 

In  the  first  place,  publishers  themselves  know  very 
little  about  the  space  they  sell  and  its  possible  use. 
The  mind  which  has  the  burden  of  purchasing  edito- 
rial, literary,  and  reportorial  ability,  the  securing  of 
subscribers,  and  the  mechanical  production  of  a  paper 
has  about  all  that  it  can  carry.  The  publisher  must 
and  usually  does  delegate  his  advertising  department 
to  another,  and  what  a  mess  he  makes  of  it  some- 
times! The  blowhard,  the  man  who  panders  to  the 
lowest  order  of  social  instincts,  and  the  brazen  bull- 
dozing type  are  frequently  found  in  positions  where 
the  publisher  himself  is  a  man  of  honor  and  high 
character.  In  such  cases  the  publisher  has  simply 
failed  to  awaken  to  the  importance  of  advertising  and 
its  great  possibilities  if  placed  in  charge  of  intelligent 
and  clean  men. 


COMMERCIAL  VALUE  OF  ADVERTISING     197 

The  advertising  agency  has  evolved  with  the 
enormous  increase  in  the  advertising  business.  The 
agent  originally  solicited  for  one  or  two  papers  and 
received  his  commission  direct  from  the  paper.  In 
time  he  began  to  get  all  or  a  large  portion  of  the  con- 
tracts placed  by  a  single  business  house,  and  his  char- 
acter as  a  direct  representative  of  the  paper  changed 
to  that  of  a  quasi-representative  of  the  advertiser.  In 
this  way  the  agent  lost  exclusive  representation  of  his 
papers  and  found  others  recognized  as  agents  working 
in  the  same  field.  Then  ensued  a  period  of  cutting 
of  rates  and  dividing  of  commissions  which  made  the 
agent  a  mere  scalper  and  an  object  of  distrust  by  both 
publisher  and  advertiser. 

The  business  has  finally  become  adjusted  by  the 
advertising  agency  becoming  what  I  have  often 
defined  it  — 

An  organization  of  men  competent  to  select  suitable  adver- 
tising media,  buy  space,  write  advertisements,  create  ideas  for 
and  make  illustrations,  submit  copy  to  advertiser  for  approval, 
then  forward  same  to  the  publisher,  see  that  same  is  correctly 
executed,  collect  from  the  advertiser,  pay  the  publisher,  and 
co-operate  with  the  advertiser  in  conceiving,  developing,  and 
perfecting  those  collateral  forms  of  advertising  effort  which  are 
necessary  to  make  a  campaign  fully  successful.  The  advertising 
agency's  services  cost  the  advertiser  nothing,  as  they  are  paid 
by  the  publisher  in  the  commission  or  lower  price  which  is 
secured  by  the  agency. 

The  publishers  of  the  Ladies'  Home  Journal, 
Delineator,  Miinsey's,  McCliire's,  and  a  few  other 
publications,  recognize  as  agents  only  those  who  have 
signed  a  contract  not  to  rebate  any  portion  of  their 
commission  to  the  advertiser.  The  tendency  of  the 
better  publications   is   toward   stability   of   rates   and 


198  LECTURES  ON  COMMERCE 

recognition  of  agencies  limited  to  those  who  are  cre- 
ative in  their  efforts  to  produce  new  advertisers. 

The  billposters  have  a  very  strong  association,  and 
since  its  organization  billposting  has  made  wonderful 
strides.  The  association  does  not  allow  its  members 
to  grant  commissions  to  any  but  authorized  solicitors. 
Any  form  of  advertising  space  that  has  not  sufficient 
inherent  strength  for  its  owner  to  maintain  a  staple 
price  for  it  has  not  enough  strength  to  become  an 
advertising  factor,  and  as  the  unmistakable  tendency 
of  all  strong  owners  of  space  is  to  recognize  the 
agency  with  a  commission  making  its  service  free  to 
the  advertiser,  the  agency's  position  is  becoming  more 
clearly  defined  and  established.  The  modern  adver- 
tising agency  keeps  on  file  complete  information  as 
to  the  cost  of  space  in  practically  every  publication, 
street  car,  and  billposting  plant  in  the  United  States 
and  Canada.  Records  of  previous  contracts  are  kept 
tabulated  for  comparison.  Personal  acquaintance 
with  publishers  and  owners  of  space  is  carefully  culti- 
vated, and  the  highest  type  of  co-operation  urged  and 
secured  wherever  possible.  Artists,  writers,  expert 
typesetters,  printers,  and  engravers  are  constantly 
employed.  The  best  methods  and  lowest  prices  for 
making  and  shipping  plates  to  the  publisher  are  care- 
fully considered.  While  the  mechanical  organization 
is  always  subordinated  to  the  professional  feature  of 
the  business,  the  equipment  is  always  the  best  possible 
to  be  secured,  just  as  any  other  professional  man 
surrounds  himself  with  the  finest  tools  of  his  trade. 

There  is  a  popular  misconception  of  the  functions 
of  the  agent.     Many  think  he  should  know  the  tech- 


COMMERCIAL  VALUE  OF  ADVERTISING     199 

nical  details  of  the  business  he  is  advertising.  Life  is 
too  short  for  him  to  learn  that,  and  it  would  be  a  mis- 
take for  him  to  attempt  it.  At  the  same  time,  a  knowl- 
edge of  nearly  everything,  even  though  it  be  only 
superficial,  can  be  utilized  in  advertising  better  than 
in  most  any  other  line  of  business.  Of  what  value 
is  the  knowledge  of  the  manufacture  of  a  camera  to 
the  advertising  man?  He  should  know  all  that  the 
camera  will  accomplish  in  the  hands  of  the  person  who 
buys  it.  He  should  study  it  wholly  from  the  buyer's 
point  of  view,  and  find  as  many  reasons  as  possible 
why  it  should  be  bought,  and  use  the  most  economical 
and  efficient  means  to  arouse  the  possible  buyer's  desire 
to  possess  it.  Knowledge  of  sales  methods  and  of  the 
established  channels  of  distribution  are  essential  to 
the  advertising  agency,  and  the  plan  it  produces  should 
incorporate  suggestions  for  utilizing  the  power  of  the 
advertising  in  all  these  ramifications. 

It  is  in  this  further  development  of  the  advertising 
idea  to  reach  the  consumer  that  what  is  known  as  the 
"follow-up"  system  has  been  evolved.  Formerly  an 
advertiser  used  his  advertising  space  merely  to  pro- 
duce publicity.  This  means  that  something  which 
makes  every  person  remember  there  is  such  a  thing  as 
Tobey  hand-made  furniture,  even  if  you  cannot  locate 
in  your  mind  just  when  and  where  you  saw  an  adver- 
tisement of  it.  Users  of  magazine  space  in  time  found 
they  could  not  only  secure  publicity,  but,  without  in 
any  way  depreciating  the  value  of  the  same,  secure  in 
addition  direct  inquiries  from  people  who  are  directly 
interested  in  the  goods  advertised.  These  inquiries 
made  a  foundation  for  a  follow-up  system,  which  gen- 


200  LECTURES  ON  COMMERCE 

erally  consists  of  some  form  of  direct  appeal  to  both 
the  inquirer  and  the  dealer  to  whom  the  person  making 
the  inquiry  is  most  likely  to  be  known.  To  illustrate, 
the  manufacturers  of  the  Munsing  underwear  offered 
in  their  magazine  advertisements  to  send  a  catalogue  to 
all  who  would  write  for  it.  The  inquiries  coming  in 
were  from  such  a  desirable  class  of  people  that  the 
sales  department  was  able  to  interest  dealers  all  over 
the  country  when  they  showed  letters  from  the  dealers' 
own  townspeople  as  an  evidence  of  the  efficiency  of  the 
advertising.  This  made  it  desirable  to  create  more 
inquiries.  So  it  was  decided  to  offer  a  doll's  under- 
shirt, showing  the  fabric,  to  every  mother  writing  in 
and  giving  the  name  of  her  dealer  and  the  number  of 
children  she  bought  underwear  for.  This  resulted  in 
getting  six  times  as  many  inquiries  from  the  same  pub- 
lications as  before.  It  does  not  stand  to  reason  that 
more  people  saw  or  read  the  announcement,  but  it  is 
certain  that  the  persons  who  replied  were,  in  the  very 
act  of  writing,  more  deeply  and  permanently  impressed 
than  if  they  had  simply  read  the  first  advertisement 
for  many  months. 

In  distributing  samples  in  connection  with  the  use 
of  street-car  cards  and  outdoor  display,  in  offering 
samples  for  coupons  published  in  papers,  in  giving 
every  dealer  in  advance  one  or  two  packages  of  an 
article,  previous  to  starting  the  local  newspaper  adver- 
tising, the  follow-up  system  has  been  successfully 
incorporated  into  advertising  work.  It  is  impossible 
to  enumerate  the  many  ramifications  of  this  idea.  In 
several  hundred  cases  that  have  come  under  my  notice 
there  have  not  been  two  alike,  and  I  have  seen  repeated 


COMMERCIAL  VALUE  OF  ADVERTISING    zoi  ' 

attempts  at  imitation  of  another's  idea  result  dis- 
astrously, because  the  individual  requirements  were 
not  carefully  studied  and  covered. 

The  one  thing  that  should  convince  the  average 
business  man  who  has  not  given  much  time  and 
thought  to  advertising  is  that  it  has  commercial  value 
of  the  highest  order;  that  it  really  is  a  higher  evolu- 
tion of  commerce  and  a  marked  improvement  on  aver- 
age commercial  conditions,  as  is  evidenced  by  the  grow- 
ing spirit  on  the  part  of  owners  of  advertising  space  to 
restrict  the  use  of  the  same  to  customers  whose  busi- 
ness is  desirable,  and  also  to  censor  the  text  matter  and, 
in  some  instances,  even  to  tone  down  the  too  free  use 
of  heavy-faced  type,  and  vary  display. 

The  up-to-date,  alert  billposter,  instead  of  fighting 
the  restrictions  in  height^,  size,  and  quality  of  the  bill- 
board, is  earnestly  advocating  them.  The  publisher 
who  knows  that  the  confidence  of  the  readers  in  his 
advertising  columns  is  a  valuable  asset  is  growing 
more  careful  every  day  as  to  what  those  columns  con- 
tain. The  advertising  man  who  realizes  the  pro- 
fessional quality  of  his  services  where  he  can  assist 
the  advertiser  to  use  the  same  space  in  the  same  publi- 
cations and  make  from  50  to  500  per  cent,  more  out 
of  them  than  the  advertiser  could  make  for  himself, 
knows  that  his  talent  must  be  guarded  and  exercised 
only  when  sincere  conviction  and  enthusiasm  can  be 
brought  into  requisition.  There  is  a  very  judicious 
golden  mean  between  the  cold,  dissecting  spirit  of  the 
study  or  the  laboratory  and  the  spectacular  appeal  to 
the  imagination  and  the  emotions. 

Napoleon  would  have  made  a  grand   advertising 


202  LECTURES  ON  COMMERCE 

man.  When  sought  for  to  quell  a  riot  raging  in  the 
streets  of  Paris,  he  was  found  in  his  attic,  alone 
and  diligently  studying  the  streets  of  the  great  city. 
When  confronted  with  the  success  of  his  later  cam- 
paigns, and  realizing  the  importance  of  having  the 
masses  with  him,  he  carefully  calculated  the  effect  of 
waiting  before  announcing  his  victories  until  he  was 
able  to  date  his  dispatch  with  the  name  of  the  palace 
of  his  defeated  adversary.  This  intelligent  combina- 
tion of  accurate  knowledge  of  the  real  fundamental 
and  subtle  forces  with  the  power  to  attract  and  hold 
the  ephemeral  popular  mind  is  the  wide  range  of  abil- 
ity that  the  advertising  man  who  succeeds  today  must 
possess. 


AT  WHOLESALE. 

A.    C.    BARTLETT,    VICE-PRESIDENT,    HIBBARD,    SPENCER, 

BARTLETT  &  CO. 

The  University  of  Chicago  is  a  wholesale  educa- 
tional establishment  with  retail  departments.  Knowl- 
edge, packed  in  gray  matter,  is  collected  from  all 
divisions  of  the  globe  and  here  distributed  at  wholesale 
to  such  patrons  as  teachers,  professors,  and  preachers, 
who  in  turn  deal  it  out  to  pupils,  parishioners,  and 
others  in  quantities  to  meet  individual  requirements, 
and  at  retail  to  the  young  ladies  and  gentlemen  whose 
acquisitions  are  for  their  own  personal  use  or  benefit. 

To  the  five  senses  the  material  collected  and  ware- 
housed at  the  University  and  shipped  to  the  markets 
tributary  to  Chicago  (which,  in  this  case,  include  the 
entire  civilized  world)  is  not  so  tangible  as  calico, 
molasses,  and  nails,  but  in  some  quarters  is  deemed 
almost  or  quite  as  essential  to  the  welfare  and  happi- 
ness of  consumers. 

A  merchant  will  contend  that  no  civilized  being  can 
exist  without  the  use  of  merchandise,  while  quite 
large  numbers  of  the  human  family  have  lived  to  a 
ripe  old  age  without  being  possessed  of  a  diploma 
from  a  university  or  even  from  a  college;  hence,  the 
most  useful  men  of  society,  the  real  benefactors  of  the 
race,  are  to  be  found  in  the  mercantile  class,  and  not 
in  the  faculties  of  the  institutions  of  higher  education. 

However,  this  paper  is  not  intended  as  an  indorse- 
ment of  that  contention,  and  the  foregoing  is  simply 

203 


204  LECTURES  ON  COMMERCE 

preliminary  to  saying  that  your  president  remarked 
to  the  writer,  in  substance:  "Our  people  at  the  Uni- 
versity know  how  education  is  dispensed,  but  many 
of  them,  even  in  the  College  of  Commerce,  have  little 
idea  of  the  operations  in  detail  of  a  wholesale  mer- 
cantile house,  and  I  wish  you  would  come  down  and 
tell  them  something  about  it."  Following  a  positive 
refusal,  on  the  ground  that  the  subject  could  not  be 
made  interesting,  came  the  assurances  and  convincing 
arguments  which  in  various  forms  have  proved  so 
convincing  to  a  multitude  of  people,  with  the  final 
result  which  you  have  before  you.  To  insure  the 
eventual  termination  of  the  talk,  it  has  been  reduced 
to  writing. 

Unfortunately  for  the  general  treatment  of  the 
subject,  the  writer  knows  no  business  except  the  one 
in  which  he  is  engaged  (and  that  none  too  well),  viz., 
the  wholesale  hardware,  and  at  the  outset  begs  your 
pardon  if  he  talks  more  about  gimlets  and  fishhooks 
than  about  silks,  satins,  teas,  hats,  caps,  boots,  shoes, 
or  books. 

The  bases  of  a  successful  wholesale  business  are 
capital;  financial  ability;  judgment  of  qualities,  both 
of  merchandise  and  men ;  a  knowledge  of  present  con- 
ditions, not  only  local,  but  general ;  a  faculty  for  fore- 
casting future  conditions  and  needs;  and  last,  but  not 
least,  a  genius  for  organization.  Men  who  each 
possess  all  of  these  qualifications  are  as  scarce  as  fit 
candidates  for  aldermen.  This  is  an  age  of  speciali- 
zation in  business  as  well  as  in  profession.  When 
your  fathers  were  lads,  the  family  physician  treated 
all  manner  of  diseases,  practiced  surgery  and  dentist- 


AT  WHOLESALE  205 

ry,  and  not  infrequently  branched  out  into  the  vet- 
erinary field.  At  the  present  time  the  M.D.  who 
sharpens  your  eyesight  and  improves  your  hearing 
hardly  knows  that  you  are  the  possessor  of  a  pair  of 
lungs.  The  surgeon  who  saws  off  your  leg  may  not 
be  on  speaking  terms  with  his  fellow-practitioner  who 
awakens  your  torpid  liver;  while  the  dentist  who  fills 
a  decayed  tooth  sends  you  to  a  professional  tooth- 
puller  to  have  a  member  in  a  little  more  decayed  state 
extracted. 

In  a  wholesale  house  it  is  not  only  necessary,  but 
indispensable,  that  either  a  partner  or  officer  in  the 
business  or  a  trusted  confidential  employee  shall  be  a 
responsible  head  of  each  department  and  of  each  sub- 
division of  that  department.  And  I  want  to  suggest 
in  parenthesis  at  this  point  that  you  promptly  dis- 
abuse yourselves  of  the  idea,  if  such  you  have,  that 
the  opportunity  for  an  energetic  but  poor  young  man 
eventually  to  rise  to  the  very  head  of  a  large  mercan- 
tile house  is  not  as  good  as  it  was  a  few  years  ago,  for 
that  idea  is  altogether  erroneous.  As  an  experienced 
merchant,  I  assure  you  that  it  is  less  difficult  today 
to  secure  ten  pounds  of  capital  than  it  is  one  ounce  of 
brains.  It  does  require  more  capital  to  inaugurate 
and  conduct  a  business  than  it  did  a  half  or  even  a 
quarter  century  ago,  but  it  also  requires  the  possession 
of  much  greater  skill,  intelligence,  and  practical  educa- 
tion to  successfully  manage  a  business  than  it  did  in 
the  olden  time.  You  do  not  begin  the  study  of 
language  by  attempting  to  read  Greek,  but  by  learn- 
ing the  English  alphabet  (if  under  the  new  methods 
of  training  the  young  I  err  in  this  statement,  you  will 


2o6  LECTURES  ON  COMMERCE 

kindly  correct  me),  nor  do  you  undertake  to  demon- 
strate the  binomial  theorem  until  you  have  mastered 
the  multiplication  table.  It  is  only  the  young  man 
inheriting  capital  who  undertakes  to  begin  his  busi- 
ness career  at  the  top.  Unless  the  young  capitalist 
has  the  good  sense  to  associate  with  him  trained 
business  men,  his  career  is  inevitably  finished  at  the 
bottom.  If  you  have  natural  qualifications  for  a  mer- 
cantile life,  make  thorough  preparation  by  way  of 
education ;  get  your  experience  by  beginning  with  the 
veriest  rudiments  of  practical  business,  and  when  you 
are  ready  to  assume  the  higher  responsibilities,  capital 
will  be  seeking  you  rather  than  you  seeking  capital. 

As  I  shall  confine  myself  mainly  to  "the  conduct 
of  business,"  I  will  not  undertake  to  deal  with  its 
founding  or  its  formative  period,  but  will  attempt  to 
give  you,  somewhat  in  detail,  an  idea  of  the  machinery 
and  its  operation  when  the  business  is  in  full  swing. 

In  my  youthful  days  I  had  a  vague  idea  that  a 
wholesale  business,  when  fairly  started,  ran  itself ;  that 
it  was  a  sort  of  clearing-house  for  the  manufacturer 
and  a  storehouse  for  the  retailer,  from  which  the 
latter  drew  his  supplies  as  needed,  the  jobber  having 
little  to  do  but  to  receive,  display,  and  ship  the  goods, 
collect  the  money  from  his  customers,  remit  a  portion 
of  it  to  the  manufacturers,  and  grow  rich.  I  learned 
from  experience  (gathered  largely  at  the  expense  of 
my  employers)  that  I  had  not,  as  a  lad,  fully  com- 
prehended the  entire  situation.  The  qualifications 
and  intellectual  requirements  of  a  successful  wholesale 
merchant  may  perhaps  be  most  easily  understood  by 
.allotting  them  all  to  a  single  individual,   and  after- 


AT  WHOLESALE  207 

ward  naming  the  divisions  which  are  ordinarily  made 
in  a  business  house. 

A  merchant  such  as  we  are  discussing  must  first 
be  a  financier,  one  who  with  a  hmited  capital  can 
conduct  the  largest  business  which  his  means  will  per- 
mit and  always  keep  his  credit  at  the  highest  point. 
By  capital  is  meant  cash  investment  and  not  certifi- 
cates of  stock;  and  the  word  "limited"  is  used  in  a 
restrictive  sense.  Unlimited  capital  is,  as  a  rule,  an 
unhealthy  element  of  business.  The  merchant's  incli- 
nation to  purchase  merchandise  must  be  held  within 
bounds  by  a  careful  calculation  of  ability  to  meet  bills 
when  due.  In  making  sales,  he  must  guard  against 
the  importunities  of  customers  and  the  pressure  of 
competition,  which  tempt  him  to  grant  too  long  time 
or  too  large  credit.  The  shadow  of  a  coming  pay- 
day hangs  over  every  transaction. 

As  a  buyer  of  merchandise,  he  must  be  governed 
in  his  purchases,  not  by  the  styles  and  qualities  which 
manufacturers  produce  for  the  country  at  large,  but 
by  his  own  personal  judgment  as  to  the  wants  of  his 
own  particular  customers.  The  old  adage,  "Goods 
-well  bought  are  half  sold,""  is  as  true  as  when  it  was 
first  promulgated.  A  buyer  must  not  only  be  a  judge 
of  values,  but  must  have  judgment  approaching  intu- 
ition as  to  what  will  sell,  and  must  have  experience  to 
determine  what  sizes,  weights,  dimensions,  etc.,  to 
select.  There  is  nothing  more  disheartening  to  a 
merchant,  or  more  destructive  to  his  profits,  than  the 
marketing  of  large  quantities  of  unsalable  goods  at 
one-half  their  purchase  price.  This  buyer  must  have 
a    carefully    studied    idea    of    future    necessities    and 


2o8  LECTURES  ON  COMMERCE 

demands.  Manufacturers,  generally  speaking,  do  not 
carry  stock,  the  bulk  of  their  product  being  manu- 
factured to  fill  specific  orders.  The  purchases  of 
wholesale  clothing  merchants  for  their  next  summer's 
stocks  were  made  months  ago,  and  the  goods  are  now 
being  manufactured.  The  requisitions  upon  foreign 
and  even  domestic  makers  of  summer  dress  goods 
have  gone  to  their  destination.  The  brands  of  the  tea 
you  will  sip  at  next  winter's  afternoon  functions  have 
already  been  determined  by  the  orders  sent  to  the 
Orient.  The  tools  which  will  be  used  in  the  harvest- 
ing of  the  coming  season's  crops  in  all  this  Northwest 
were  bought  by  the  wholesale  merchant  last  Novem- 
ber. A  successful  buyer  must  have  judgment  border- 
ing on  o-enius  to  determine  what  new  styles  and  new 
inventions  will  prove  salable  and  will  do  credit  to  the 
house  which  distributes  them.  The  best  profits  being 
made  upon  the  new  articles  before  competition  or 
commonness  has  cheapened  them,  the  temptation  is  to 
be  a  pioneer  on  a  large  scale.  When,  for  some  unfore- 
seen cause,  the  public  fails  to  co-operate,  or,  having 
purchased,  discovers  a  lack  of  utility,  the  outcome  and 
echo  of  the  transaction  seems  to  the  buyer  to  extend 
to  the  ends  of  the  world  and  throughout  all  time. 

He  must  give  such  instructions  to  manufacturers 
regarding  the  division  of  shipments  as  will  insure  an 
ability  to  store  a  full  stock  at  the  time  needed,  and  a 
certainty  of  financial  ability  to  meet  the  bills.  Not 
only  must  he  give  the  instructions,  but  must  be  satis- 
fied that  the  manufacturer  can  obey  them;  otherwise, 
when  the  demands  from  his  customers  materialize,  he 
will  be  unable  to  meet  them. 


AT  WHOLESALE  209 

A  successful  merchant  is  one  who  grants  credit 
with  a  hberahty  which  insures  the  loyalty  of  his 
customers,  and  with  a  conservatism  which  guards 
against  losses.  To  be  a  judge  of  credits  means  to 
be  a  judge,  not  only  of  what  constitutes  a  good  risk 
based  upon  assets  and  liabilities,  but  of  human  nature 
as  well.  A  combination  of  small  capital,  good  char- 
acter and  habits  (business  and  otherwise),  thrift,  and 
industry  is  a  much  better  groundwork  for  a  line  of 
credit  to  a  customer  than  is  large  capital,  indifferent 
character  and  habits,  and  loose,  unbusinesslike  meth- 
ods. It  goes  without  saying  that  adequate  capital, 
unimpeachable  integrity,  and  strict  business  methods 
constitute  the  ideal  risk. 

The  successful  merchant  must  possess  the  varied 
qualifications  of  salesmanship.  To  be  a  good  sales- 
man is  not  only  in  itself  a  trade,  but  an  accomplish- 
ment. A  first-class  salesman  must  not  only  know 
his  goods  and  their  values,  but  must  be  equally  well 
informed  regarding  the  lines  with  which  he  will  come 
in  competition.  He  must  be  able  to  win  and  retain 
the  confidence  of  the  men  with  whom  he  transacts 
business.  In  making  sales,  he  must  consider  the 
interests  of  both  the  buyer  and  the  seller.  He  must 
know  that  a  sale  which  overstocks  a  customer  or 
gives  him  ground  for  feeling  that  he  has  been  uninten- 
tionally overcharged,  or  in  any  manner  defrauded,  is 
the  most  unprofitable  sale  that  can  possibly  be  made. 
An  ideal  salesman  is  not  one  who  depends  upon  what 
is  vulgarly  known  as  "a  gift  for  gab."  One  of  the 
best  salesmen  I  ever  knew  was  the  most  quiet  and 
least  obtrusive  in  his  manner.     A  thoroughly  equipped 


2IO  LECTURES  ON  COMMERCE 

salesman  must  have  confidence  in  the  merchandise  he 
is  selling,  and  be  able  to  exert  personal  magnetism. 
A  man  who  never  makes  friends  never  makes  custom- 
ers. 

A  successful  merchant  must  be  capable  of  so 
u  organizing  the  working  of  his  business  machinery  as 
to  secure  the  most  prompt  and  accurate  transactions 
with  the  least  unnecessary  expenditure  or  waste 
of  energy  or  money.  In  these  days  of  general 
expansion  and  quick  action,  the  merchant  who  has 
not  his  business  thoroughly  organized,  and  has  not 
adopted  the  latest  up-to-date  methods,  must  withdraw 
from  the  procession  or  submit  to  being  run  over. 
Time  is  becoming  the  essence  of  a  business  trans- 
action. As  an  illustration,  the  Chicago  and  North- 
Western  Railroad  Company  loads  by  six  o'clock  in 
the  evening  all  the  merchandise  received  at  its  depots 
up  to  five  o'clock  of  the  same  day  and  distributes  it 
at  the  various  stations  in  eastern  Iowa  the  following 
morning.  A  retail  merchant  at  Cedar  Rapids  before 
leaving  his  ofBce  Monday  evening  orders  by  mail  a 
bill  of  goods  from  a  wholesale  house  in  Chicago. 
The  order  reaches  its  destination  Tuesday  morning, 
and  if  the  Cedar  Rapids  man,  upon  arriving  at  his 
place  of  business  Wednesday  morning,  does  not  find 
his  clerks  unpacking  the  goods,  he  concludes  that  his 
Chicago  correspondent  is  a  back  number.  If  during 
the  next  twenty-five  years  business  continues  to  be 
accelerated  in  the  same  ratio  in  which  it  has  been 
moving  during  the  past  twenty-five,  an  Omaha  mer- 
chant will  send  his  order  to  Chicago  by  telephone,  and 
if  the  goods  do  not  arrive  as  an  echo  to  the  order,  he 


AT  WHOLESALE  21 1 

will  think  something  has  gone  wrong  in  the  mercan- 
tile world. 

As  it  would  be  nearly  as  impossible  to  find  a 
perfect  human  being  as  one  who  embodies  in  a  degree 
approaching  perfection  all  the  qualifications  named 
for  a  successful  merchant,  the  duties  attaching  to 
his  vocation  are  divided  among  different  heads  of 
departments  of  financing,  buying,  crediting,  selling, 
managing,  etc.,  each  of  whom  is  supposed  to  possess 
the  requisite  qualifications  for  his  particular  branch 
of  the  business. 

Having  at  least  attempted  to  show  you  the  skeleton 
upon  which  a  wholesale  business  is  constructed,  I  will 
undertake,  in  a  hasty  and  somewhat  superficial  Vv^ay, 
to  outline  some  of  the  details  of  the  daily  routine. 

An  order,  whether  secured  by  the  personal  solici- 
tation of  a  salesman  upon  the  road,  purchased  by  the 
retail  merchant  in  the  sample  room,  or  transmitted 
voluntarily  by  mail,  after  reaching  the  counting- 
room  takes  the  same  general  course.  First  it  goes 
to  clerks,  by  whom  the  amount,  in  dollars,  of  the 
order  is  estimated  for  the  purpose  of  enabling  the 
Credit  Department  to  judge  of  the  responsibility  of 
the  customer  for  that  particular  bill  of  goods.  The 
order  then  goes  to  the  bookkeepers,  whose  ledgers 
represent  the  various  states  in  the  territory  from  which 
the  house  draws  its  trade.  Each  account  on  the  ledger 
has  at  its  head  certain  cabalistic  signs,  placed  there 
under  the  instructions  of  the  Credit  Department,  which 
tell  the  bookkeeper  the  extent  of  credit  to  which  the 
customer  is  entitled,  the  time  allowed  for  payment,  etc., 
etc.      If    the    conditions    indicated    have    been    ful- 


212  LECTURES  ON  COMMERCE 

filled,  the  order  is  initialed  and  goes  directly  to  the 
Order  Department.  If  the  conditions  have  not  been 
fulfilled — if  the  party  has  bought  beyond  his  limit, 
has  failed  to  pay  his  bills  promptly,  or  if  otherwise 
out  of  line — the  order  goes  to  the  Credit  Department 
for  consideration  and  special  treatment.  It  may  be 
passed  or  may  be  rejected,  the  final  disposition  being 
dependent,  in  part,  upon  new  information  regarding 
the  customer  himself,  or  the  crop  prospects,  or  other 
temporary  or  local  conditions;  and  in  part  upon  the 
momentary  state  of  the  credit  man's  liver  or  digestive 
org-ans.  A  large  financial  house  in  this  city  requires 
a  physician's  certificate  before  engaging  a  man  who 
will  at  once  or  may  at  some  future  time  occupy  a 
responsible  position.  The  information  upon  which  a 
credit  man  bases  his  judgment  is  drawn  from  personal 
interview  with  customers,  investigations  made  by  the 
traveling  salesmen,  letters  of  bankers  and  other  refer- 
ences, reports  of  commercial  agencies,  and,  best  of  all, 
detailed  statements  made  upon  prescribed  forms  by 
the  customer  himself  over  his  own  signature. 

An  order,  having  passed  the  ordeal  of  a  book- 
keeper's set  rules  and  a  credit  man's  judgment,  goes 
to  the  Order  Department,  is  put  into  perfectly  intelligi- 
ble shape  as  relates  to  the  numbers,  qualities,  etc.,  of  the 
goods  to  be  shipped  (the  items  not  in  stock  and  to  be 
bought  are  copied  into  the  city  buyer's  book),  and 
then  is  placed  in  a  spring-back  book  (each  containing 
but  the  single  order),  the  cover  to  which  indicates  its 
exact  rights  in  the  procession  of  orders  awaiting  exe- 
cution. For  example,  a  red-covered  book  containing 
an  order  which  should  be  filled  with  the  utmost  dis- 


AT  WHOLESALE  213 

patch  takes  precedence  over  books  of  any  other  color 
in  the  selection  of  goods,  their  being  called  back, 
packed,  and  invoiced.  The  blue  books  would  follow 
the  exhaustion  of  the  red  pile,  and  would  in  turn  be 
followed  by  green;  etc.,  etc. 

Order  clerks  with  rolling  baskets  or  trucks  select 
the  goods  in  the  various  departments,  after  which  the 
merchandise  is  assembled  in  the  packing-room,  called 
back  by  men  who  were  not  parties  to  its  selection, 
packed,  and,  from  instructions  given  upon  the  various 
slips  and  tags  accumulated  during  the  execution  of 
the  order,  is  shipped  by  the  Shipping  Department. 
After  the  order  is  "called  back,"  the  book  goes  to  the 
pricers  for  pricing,  to  the  examiners  for  the  examina- 
tion of  these  prices,  and  to  the  invoice  clerks  for 
invoicing.  The  invoice  is  sent  to  the  journal  clerk 
for  journalizing,  and  thence  to  the  Mailing  Depart- 
ment for  folding,  inclosing,  and  stamping.  Later  on, 
the  original  order  is  checked  against  the  journal  entry 
to  show  that  there  have  been  no  errors  in  entering  or 
no  invoices  unwittingly  mailed  without  first  having 
been  journalized.  From  this  point,  it  is  a  matter  of 
bookkeeping  until  the  statements  of  account  reach  the 
collector. 

I  have  endeavored,  in  a  few  words,  cutting  many 
corners,  to  give  you  an  idea  of  a  single  department — 
that  of  order-filling.  It  would  be  wearisome  and 
unprofitable  to  you  if  I  should  go  in  detail  through 
the  Financing,  Cashier's,  Buying,  Credit,  Collection, 
Traveling  Salesmen's,  Receiving,  Shipping,  and  the 
numerous  other  departments,  each  of  which  has  its 
system  and  its  definite  part  of  the  work  to  perform. 


214  LECTURES  ON  COMMERCE 

Even  the  head  of  the  Stationery  Department  of  a  large 
mercantile  house  has  more  duties  and  greater  responsi- 
bility than  falls  to  the  lot  of  the  proprietor  of  a  small 
retail  establishment.  The  wheels  and  even  the  most 
unimportant  cogs  on  the  wheels  of  this  complicated 
machinery  must  be  carefully  adjusted  or  the  product 
will  be  worthless.  The  successful  merchant  is  not  the 
man  who  is  looking  for  some  amusement  or  outside 
employment  with  which  to  kill  time. 

The  young  man,  whether  graduate  of  a  high  school, 
college,  or  university,  who  wishes  to  learn  a  mercan- 
tile business  usually  finds  himself  at  seven  o'clock  on 
the  first  morning  of  his  business  career  taking  off  his 
coat  and  putting  on  his  overalls  in  front  of  an  order 
clerk's  locker.  At  some  future  time  there  may  be 
discovered  a  process  by  which  the  theories  gained  in 
the  schools  may  be  put  in  practice  in  mercantile  life 
without  the  necessity  for  actual  contact  with  merchan- 
dise on  the  part  of  their  possessors,  but  it  will  be  when 
experience  has  ceased  to  be  a  teacher;  when  observa- 
tion will  be  the  conservator  of  all  knowledge.  The 
best  mechanical  engineer  is  the  man  who  has  hung  his 
diploma  from  a  school  of  engineering  in  his  room, 
and  gone  down  into  the  machine  shop  and  handled 
steel  and  iron  without  gloves.  A  man,  to  be  a  success- 
ful merchant,  must  at  some  time  master  theory,  and 
the  best  time  and  place  for  this  mastery  is  during  his 
younger  days  and  in  the  schools. 

Occasionally  a  man  who  has  received  only  a  rudi- 
mentary education  becomes  a  brilliant  and  effective 
preacher.  Here  and  there  a  man  whose  school  educa- 
tion was  confined  to  his  acquirements  in  the  grammar 


AT  WHOLESALE  215 

grades  makes  his  way  to  the  very  front  rank  of  the 
legal  fraternity.  At  infrequent  intervals,  a  man  who 
has  been  obliged  to  forego  the  advantage  of  a  liberal 
education  has  evinced  a  genius  in  diagnosis  and  thera- 
peutics which  has  placed  him  near  the  head  of  the  medi- 
cal profession.  And  so  there  are  men  who  seem  instinc- 
tively to  be  merchants  and  whose  theories  are  evolved 
inductively  from  practice,  without  the  labor  incident 
to  acquirement  through  study. 

Because  there  is,  exceptionally,  a  preacher,  lawyer, 
or  doctor  who  has  risen  to  eminence  despite  his  lack 
of  book  training,  you  would  not  advocate  the  cutting 
of  higher  education  by  men  seeking  the  professions. 
Neither  should  you  advise  a  young  man  who  is  headed 
toward  a  commercial  life  to  accept  less  education  and 
mental  discipline  from  the  schools  than  the  utmost 
which  is  essential  to  the  highest  achievement. 

If  a  man  is  content  to  be  always  a  country  school- 
house  preacher,  or  a  pettifogger  in  a  village  justice 
court,  or  an  herb  doctor  on  the  frontier  of  civilization, 
there  is  no  use  in  wasting  good  book  learning  on  him 
or  in  taking  the  time  of  educators  in  attempting  to 
stimulate  his  brain  into  activity. 

If  a  man  is  content  to  spend  his  life  as  the  proprietor 
of  a  crossroads  store,  sitting  on  a  nail  keg,  chewing 
tobacco,  and  exchanging  stories  with  his  lounging 
customers,  he  is  fully  equipped  educationally  and 
theoretically  when  he  has  partially  mastered  the  three 
R's. 

What  we  are  considering  today  is  "At  Wholesale," 
and  the  preparation  must  be  commensurate  with  the 
position  and  results  to  be  attained.     Were  I  to  recom- 


2i6  LECTURES  ON  COMMERCE 

mend  to  a  young  man  who  can  command  the  necessary 
time  and  means  a  preparatory  course  for  a  commercial 
Hfe,  it  would  be  as  follows,  viz. : 

A  thorough  training  at  a  secondary  school — such 
a  training  as  would  not  only  permit  of  his  entering 
college  without  conditions,  but  would  actually  enable 
him  to  write  legibly  and  spell  correctly.  I  admit  that 
I  am  old-fashioned  when  I  suggest  that  an  elementary 
knowledge  even  of  chirography  and  orthography  are 
essential  to  a  liberal  education,  and  I  make  the  sug- 
gestion with  hesitation.  I  am  impelled  to  do  so 
by  the  knowledge  that  there  are  some  antiques  in 
business  who  are  so  grounded  in  old  methods  that 
they  insist  upon  consigning  to  the  waste  basket  illy 
written  and  misspelled  applications  for  situations,  even 
though  the  letters  be  signed  by  college  or  university 
graduates.  These  old  fossils  have  an  idea  that  igno- 
rance or  carelessness  shown  in  a  letter  of  application 
written  by  a  young  man  who  has  spent  nearly  all  his 
early  life  in  acquiring  knowledge  and  gaining  accuracy 
does  not  portend  great  success  in  a  mercantile  career. 

Entering  college,  he  should  select  the  courses  offered 
which  will  give  him  the  best  instruction  in  all  that  per- 
tains to  commerce  and  the  most  thorough  discipline 
of  mind.  The  coveted  college  diploma  and  univer- 
sity  degree  at  the  top  of  the  tree  of  knowledge 
are  becoming  more  and  more  attainable  by  the  student 
who  has  been  obliged  to  forego  digging  among  the 
Greek  roots  or  lingering  upon  those  lower  branches 
marked  "B.C." 

As  no  aspiring  young  man  possessed  of  brains,  who 
has  a  proper  conception  of  what  constitutes  the  best 


AT  WHOLESALE  217 

manhood,  the  most  real  happiness,  and  the  greatest 
useftihiess  in  the  world,  will  be  satisfied  with  the 
prospect  of  a  life  devoted  exclusively  to  business,  he 
must,  necessarily,  broaden  his  education  to  meet  the 
requirements  of  his  ideal.  The  college  or  university 
course  should  include,  not  only  commercial  and  kin- 
dred or  related  branches,  but  all  classes  of  information 
and  knowledge  within  reach  which  can  be  utilized  in 
the  life  of  an  intelligent,  broad-minded,  public-spirited 
citizen.  Business,  like  a  profession,  should  be  the 
means  to  an  end. 

After  a  diploma  is  secured,  a  year,  if  possible,  is 
well  spent  in  a  retail  establishment  of  the  particular 
line  of  merchandising  which  has  been  chosen. 

Then  comes  the  elementary  practice  in  a  wholesale 
house,  with,  let  us  hope,  a  rapid  advancement  from  one 
department  to  another,  until  the  former  college  student 
becomes  the  head  of  a  firm  or  the  president  of  a 
corporation. 


THE    CREDIT    DEPARTMENT    OF    MODERN 

BUSINESS. 

DORR  A.  KIMBALL,  CREDIT  MAN,  MARSHALL  FIELD  &  CO. 

Commerce  and  credit  go  hand  in  hand — they  are 
inseparable.     Practically  speaking,  the  office  or  func- 
tion of  credit  is  to  secure  the  willing  transfer  of  capital 
from  the  possession  of  those  who  have  it  to  those  in 
need  of  it.     Credit  may  be  looked  upon  as  an  economic 
force  of  the  highest  importance,  for  in  every  civilized 
country  credit  has  been  absolutely  necessary  to  develop 
great  enterprises.     Without  it,  no  nation,  no  state,  no 
community  can  be  strong.     Destroy  a  man's  credit 
and  you  destroy  the  possibility  of  his  making  a  success 
of    his    business.     Think    for    a    moment    what    an 
important  factor  credit  has  been  in  our  own  country. 
During  the  dark  days  of  our  Civil  War,  to  use  a  stock 
phrase,  the  United  States  was  short  on  money,  but 
fortunately  long  on   credit,   and   credit  'gave  to   the 
promise  of  the  government  at  Washington  a  power 
sufficient  to  bring  into  the  treasury  over  three  thousand 
millions  of  dollars,  all  of  which  was  forever  lost  and 
swallowed  up  in  the  horrible  vortex  of  cruel  war.     But 
if  our  nation  had  had  no  credit  it  would  have  ceased  to 
exist,  and  you  and  I  would  have  been  left  in  a  worse 
condition  than  Edward  Everett  Hale's  "Man  without  a 
Country."     Again,  when  Chicago  was  destroyed  by 
fire,  scores  of  business  men  were  thoroughly  discour- 
aged  and   utterly   cast   down,    and   many   exclaimed: 
"We  are  ruined!"  "Everything  is  lost!"  "Poor  Chicago 

zi8 


THE  CREDIT  DEPARTMENT 


219 


is  wiped  off  the  map  forever!"  Those  men  were  in 
no  condition  of  mind  at  that  time  to  appreciate  the 
miraculous  power  of  credit,  which  soon  brought  new 
money  to  the  work  of  reconstruction  and  made  this 
city  what  it  is  today.  Someone  has  pertinently  said : 
"Credit  is  to  business  what  mortar  is  to  a  brick  wall — 
it  is  the  adhesive  material  with  which  commerce  is 
cemented."  A  few  years  ago  I  was  an  eyewitness  of 
a  great  commotion  at  the  corner  of  Adams  and  La 
Salle  streets,  where  our  great  Illinois  Trust  and 
Savings  Bank  was  then  located.  Men,  women,  and 
children  crowded  into  the  office  of  the  bank,  and  a 
line  of  depositors  extended  far  out  into  the  street. 
What  was  the  matter?  These  people  were  alarmed; 
they  had  serious  doubts  as  to  the  credit  of  that  bank. 
Now  the  bank  was  perfectly  good  and  remained  open 
long  after  business  hours  to  attend  to  the  wants  of  its 
customers,  and  night  after  night  the  tellers  remained 
at  their  posts  paying  every  depositor  who  called  for 
his  money,  the  result  being  that  several  hundred 
thousand  dollars  were  withdrawn  from  circulation  and 
locked  up  in  safety  deposit  vaults  as  so  much  dead 
capital  for  the  time  being.  Thus  it  will  be  noticed 
that  all  this  disturbance  and  excitement  was  occasioned 
by  a  doubt  as  to  that  bank's  credit.  Panics  originate 
in  like  manner — not  for  lack  of  money,  not  for  lack 
of  work,  not  for  lack  of  trade,  not  for  lack  of  food, 
but  simply  for  lack  of  credit.  Credit  is  the  legitimate 
offspring  of  confidence,  and  confidence  is  the  rock 
(the  great  Gibraltar)  on  which  the  vast  commercial 
interests  of  this  world  are  resting.  Annihilate  con- 
fidence, and  immediately  you  destroy  credit  and  com- 


220  LECTURES  ON  COMMERCE 

merce,  and  civilization  with  all  its  benefits  will  follow 
in  the  train  of  their  destruction.  Unless  we  can  have 
faith  and  confidence  in  each  other's  honesty,  there  can 
be  no  credit,  and  without  credit  there  can  be  but  little 
business,  as  credit  and  confidence  are  inseparable. 

When  a  wholesale  dealer  sells  goods,  he  sells  for 
cash  or  on  credit.  Some  transactions  are  called  cash 
transactions  when  in  reality  they  are  purely  matters 
of  credit.  To  illustrate:  A  merchant  residing  in 
Nebraska  visits  Chicago  to  buy  goods  (he  says)  for 
cash,  but  sometimes  he  means  this:  When  the  goods 
are  received  at  his  store  in  Nebraska  and  the  bills  are 
checked  off,  then  he  will  remit  for  them.  Now,  if 
the  wholesale  dealer  agrees  to  this,  he  makes  a  credit, 
i.  e.,  he  trusts  that  man  at  least  a  few  days  from  the 
time  the  goods  leave  Chicago  until  the  money  is 
received  according  to  this  arrangement. 

Buying  and  selling  constitute  trade,  and  if  every 
trade  were  made  strictly  for  cash,  the  merchant  who 
could  buy  the  most  and  sell  the  most  to  the  best  advan- 
tage would  make  the  greatest  success.  But  right  here 
every  dealer  faces  this  fact,  that  most  of  the  business 
of  this  world  is  done  on  credit ;  that  is  to  say,  the  seller 
parts  with  his  property  and  receives  from  the  buyer 
a  substitute — a  promise  of  future  payment,  sometimes 
in  writing,  but  frequently  verbal;  and  I  have  known 
of  occasions  when  that  was  all  the  seller  ever  did 
receive. 

Now,  the  fulfilment  of  this  promise  depends  upon 
several  things  :  First,  the  buyer's  honesty ;  second,  his 
ability ;  third,  his  experience ;  and  many  other  things. 
If  the  buyer  is  honest,  the  seller's  safety  depends  upon 


THE  CREDIT  DEPARTMENT  221 

the  buyer's  success ;  and  the  buyer's  success  is  depend- 
ent upon  his  quahfications,  and  other  circumstances 
over  which  he  may  or  may  not  have  control.  Every 
large  wholesale  house  employs  a  person  whose  special 
work  is  to  look  after  the  credits  of  that  establishment, 
and  he  is  called  the  "credit  man;"  and  if  he  proves  a 
credit  to  his  employers,  he  will  always  trust  the  proper 
parties  and  decline  credit  to  those  unworthy  of  it.  He 
should  be  careful,  cool,  courteous;  not  too  hasty, 
but  possessed  of  sufficient  courage  to  back  up  his  con- 
victions. He  ought  to  be  a  good  judge  of  faces,  for 
often  the  countenance  is  the  index  to  the  heart;  and  if 
he  can  detect  quickly  when  a  man  is  not  telling  the 
truth,  it  is  of  great  advantage.  A  dealer  once  said  to 
me:  "Beware  of  so-and-so" — naming  a  would-be  pur- 
chaser; "when  he  tells  you  about  his  resources,  it  is 
always  best  to  deduct  75  per  cent,  from  his  statement ; 
and  if  he  makes  it  pretty  large,  you  would  better  take 
off  10  per  cent,  extra,  and  the  result  will  then  be  pretty 
near  correct." 

I  am  going  to  ask  you  for  a  few  minutes  to  think 
with  me  of  some  of  the  fundamentals  that  a  good  credit 
man  bears  in  mind  when  performing  the  duties  of  his 
occupation. 

Fundamental  No.  i  :  The  very  first  point  that  a 
credit  man  wishes  to  settle  in  his  own  mind  is  that  the 
party  seeking  credit  is  honest.  "An  honest  man  is  the 
noblest  work  of  God,"  is  a  very  old  maxim,  but  it  is 
just  as  true  today  as  when  the  words  were  first  uttered. 
"Honesty  is  the  best  policy,"  is  another  truism,  which 
is  thoroughly  understood  in  every  condition  of  life. 
From  a  purely  commercial  standpoint  a  man's  reputa- 


222  LECTURES  ON  COMMERCE 

tion  for  honesty  is  the  best  asset  he  can  have  in  his 
business :  I  know  it  is  true  that  we  sometimes  hear 
men  say  facetiously  that  such  old-fashioned  adages 
about  honesty  sound  very  pretty,  they  are  very  nice 
sentiments,  but  really  the  up-to-date  man  of  the 
twentieth  century  conducts  modern  business  on  new 
lines  and  has  no  particular  use  for  maxims  that  should 
be  consigned  to  a  state  of  innocuous  desuetude.  Never 
was  there  a  greater  falsehood  uttered.  Not  only  do 
honest  men  believe  honesty  is  the  best  policy,  but  dis- 
honest men  believe  it  too.  Of  course,  the  latter  class 
cannot  speak  from  experience,  but  they  learn  by 
observation.  An  old  merchant  of  the  "David  Harum" 
type  said  to  a  young  man  just  entering  upon  a  business 
career :  "See  here !  start  right !  always  remember  this : 
Honesty  is  the  best  policy.  I  know,  because  I  have 
tried  both  ways  myself."  Secretary  Gage  of  the  United 
States  Treasury  in  an  address  laid  down  this  axiom : 
"All  good  men  love  the  approval  of  the  good,  and  all 
bad  men  are  held  in  check  by  fear  of  a  good  man's 
reproach."  When  a  man  is  known  to  be  lacking  in 
honesty,  no  one  wants  to  take  any  chances  on  him  or 
have  anything  to  do  with  him,  and  the  credit  man's 
happiness  increases  as  he  hears  the  sound  of  that  man's 
footsteps  receding  in  the  distance. 

Fundamental  No.  2 :  After  a  man's  reputation  for 
honesty  is  settled  in  the  mind  of  the  credit  man,  very 
naturally  he  wants  to  know  about  the  ability  of  his 
prospective  customer  to  carry  on  his  business  success- 
fully. Ability  in  the  abstract  is  one  thing,  but  ability 
in  the  special  line  of  one's  undertaking  is  quite  another 
thing.     Statistics  are  often  cruel;  they  inform  us  that 


THE  CREDIT  DEPARTMENT  223 

less  than  ten  of  every  one  hundred  men  engaged  in 
business  are  successful  during  their  whole  lives.  Is 
not  this  a  sad  commentary  on  humanity?  Something 
must  be  radically  wrong  somewhere.  One  thing 
appears  to  be  certain :  there  are  too  many  "misfits" 
in  life.  I  have  known  a  first-class  farmer  to  sell  his 
farm  and  invest  the  money  in  a  mercantile  establish- 
ment, and  then  make  a  failure.  Why?  He  was  a 
good  farmer,  but  he  had  no  experience  in  keeping  a 
store.  Most  good  lawyers  would  make  poor  physi- 
cians. A  person  should  choose  that  profession  or 
vocation  which  is  suited  to  his  particular  ability,  but 
too  often  the  "round"  men  get  into  "square"  places, 
or  the  "square"  men  get  the  "round"  places,  and  the 
result  is  a  misfit ;  but  it  is  not  discovered  early  enough 
to  make  the  change;  and  I  believe  that  some  of  the 
sad  tragedies  of  life  can  be  traced  to  this  cause. 

Thirdly :  A  man  may  be  honest  and  possess  great 
ability,  but  if  he  lack  application  and  industry,  his 
chances  of  success  are  precarious.  This  age  is  one  of 
push  and  of  competition,  and  there  is  no  place  for  lazy 
men.  The  merchants'  path  is  not  strewn  with  roses, 
no  matter  how  attractive  it  may  appear  to  the  outsider. 
"Jacob,  my  son,  take  good  care  of  your  store,  and 
by  and  by  your  store  will  take  care  of  you!"  This 
was  the  advice  of  a  Hebrew  father  to  his  son.  Appli- 
cation to  business  is  the  strong  element  toward  success. 
I  heard  a  story  the  other  day  which  may  serve  as  an 
illustration.  Mr.  Rosenberg  was  teaching  his  son  to 
be  a  clerk  in  his  clothing  store.  While  the  father  was 
absent  at  dinner  the  first  day  the  boy  began  his  service, 
the  boy  sold  a  suit  of  clothes  and  naturally  was  quite 


224  LECTURES  ON  COMMERCE 

elated.  On  the  return  of  his  father  the  boy  asked  him 
if  he  did  not  think  he  was  making  splendid  progress. 
The  father,  fearing  his  son  might  arrogate  to  himself 
undue  importance  on  account  of  the  transaction,  said : 
"My  boy,  that  man  wanted  a  suit  of  clothes,  didn't 
he?"  "Of  course  he  did,"  exclaimed  the  boy;  "and  I 
was  smart  enough  to  sell  him!"  "Well,"  continued 
the  father,  "you  still  have  many  things  to  learn. 
When  a  man  comes  in  this  store  and  wants  to  buy  a 
suit  of  clothes  and  you  sell  him,  that  is  all  right ;  but, 
my  boy,  when  a  man  comes  in  this  store  and  doesn't 
want  to  buy  a  suit  of  clothes  and  you  sell  him — Levi, 
that's  business." 

The  modern,  up-to-date  credit  man  should  be  like 
the  apostle  Paul  in  this  respect :  He  should  be  a  man 
of  great  faith  —  faith  in  his  fellow-man,  Paul's 
eleventh  chapter  of  Hebrews  is  nothing  more  nor  less 
than  a  statement  of  wonderful  things  accomplished  by 
the  use  of  faith.  Paul  says  faith  is  the  substance  of 
things  hoped  for — the  evidence  of  things  not  seen. 
The  credit  man's  definition  is  the  same.  I  never  look 
at  a  mercantile  ledger  which  contains  accounts  against 
customers  to  whom  credit  has  been  given  without 
thinking  that  the  ledger  represents  Paul's  idea  of  faith, 
for  in  it  will  be  found  the  substance  of  things  hoped 
for — the  evidence  of  things  not  seen.  Therefore  it  can 
be  truly  said  that,  just  as  the  exercise  of  faith  is 
required  in  all  spiritual  matters,  likewise  faith  is  the 
dominant  element  in  commercial  life. 

I  have  thus  far  dwelt  on  the  importance  of  things 
which  in  themselves  alone  do  not  pay  bills;  that  is 
to  say,  no  one  can  take  $i,ooo  worth  of  honesty,  $500 


THE  CREDIT  DEPARTMENT  225 

worth   of  ability,   and   $100   worth   of   industry   and 
exchange  these  with  a  wholesale  dealer  for  dry  goods, 
unless  the  applicant  is  possessed  of  a  certain  amount 
of  capital.     While  it  is  true  that  absolute  confidence 
in  the  integrity  of  the  buyer  is  the  great  consideration 
for  which  credit  is  given,  yet  in  most  cases  the  dealer 
would  also  require  for  his  safety  that  the  buyer  should 
possess  some  capital  of  his  own;  and  the  larger  that 
capital,  the  better  it  is  for  both  debtor  and  creditor. 
The  amount  of  capital  required  in  any  particular  case 
to  insure  safety  and  success  is  an  uncertain  quantity, 
for  the   reason  that   some   men   have  the   faculty   of 
making  money     under  the  most  unfavorable  circum- 
stances,  while  others,   even  more   favorably   situated, 
can  never  make  both  ends  meet;    therefore  the  credit 
man  is  obliged  to  consider  in  every  individual  case  the 
elements  that  go  to  make  up  a  good  business  man. 
To    illustrate:    Here    is    a    certain    young    man    just 
commencing  business.     He  has  been  a  clerk  for  many 
years,  and  has  had  considerable  experience  in  the  kind 
of   business   he   is    now    undertaking.     He    has    been 
economical  and  has  accumulated  a  few  hundred  dollars, 
saving  it  from  his  salary.     Now,  every  dollar  of  his 
capital  has  an  enhanced  value  to  him.     In  the  first 
place,  he  earned  it  himself;  and,  secondly,  by  practice 
of  rigid  economy  he  has  saved  it;    and  having  both 
earned  and  saved  he  understands  the  value  of  money 
as  no  one  can  who  has  done  neither.     Such  a  young 
man  is  worthy  of  confidence.     But,  on  the  other  hand, 
here   is  another  young  man   just   commencing,    with 
little    ability    and    no    experience    whatever.     Some 
kind,  well-intentioned  uncle  or  aunt  has  furnished  him 


226  LECTURES  ON  COMMERCE 

capital  to  start  with,  and  the  world  smiles  and  says : 
"What  a  lucky  young  fellow!  There  is  no  end  of 
money  behind  him!"  But  my  observation  proves  that 
in  about  nine  cases  out  of  ten  the  end  of  his  money  is 
seldom  long  in  being  reached.  The  credit  man  finds 
but  little  difficulty  in  handling  a  case  of  this  kind,  for 
if  he  sells  this  young  man  without  the  guaranty  of 
his  relative  or  some  other  responsible  person,  he  can 
blame  no  one  but  himself  if  he  makes  a  loss.  Some 
merchants,  however,  are  so  anxious  to  sell  goods  that 
they  permit  this  desire  to  interfere  with  their  better 
judgment  in  making  a  credit.  If  it  were  a  question  of 
loaning  money,  oftentimes  they  would  hesitate  before 
making  a  loan  to  some  whom  they  do  not  question 
when  making  a  credit  for  merchandise.  The  trouble 
with  this  class  of  dealers  is  that  they  look  upon 
merchandise  as  something  that  must  be  kept  moving, 
and  sometimes  they  find  themselves  in  this  predicament, 
that  both  their  customer  and  the  merchandise  sold  him 
on  credit  move  so  far  away  that  they  are  never  heard 
from  again. 

The  question  naturally  arises :  How  does  the 
credit  man  obtain  the  necessary  information  to  enable 
him  to  determine  what  is  best  to  do?  A  personal 
interview  always  gives  him  an  opportunity  to  learn 
from  the  would-be  debtor  what  his  condition  is.  Now 
for  a  moment  please  imagine  you  are  all  credit  men, 
and  I  am,  say,  John  Smith,  a  country  merchant  living 
at  Wichita,  Kan.,  and  I  come  into  your  establishment 
for  the  first  time  wishing  to  replenish  my  stock,  and  I 
inform  the  salesman  to  whom  I  am  assigned  that  I 
desire  to  purchase  goods  on  the  usual  credit  terms. 


THE  CREDIT  DEPARTMENT  227 

The  salesman  is  very  polite  and  says  to  me :  ''I  am 
very  glad,  Mr.  Smith,  to  see  you,  and  our  credit  man 
who  passes  on  these  matters  will  also  be  glad  to  meet 
you.  I  will  introduce  you  to  him.  He  presents 
me  to  you,  and  you  in  a  kind  and  gentle  way  begin  to 
question  me  in  reference  to  my  business  affairs,  per- 
haps somewhat  like  this :  "How  large  a  stock  of 
merchandise  have  you  on  hand  at  present?"  And  I 
reply :  "Five  thousand  dollars."  You  then  ask  if  I 
sell  my  goods  on  credit  or  for  cash,  and  I  reply :  "For 
cash."  "Have  you  any  other  resources?"  "Yes,  I 
have  cash  on  hand,  i.  e.,  on  deposit  in  the  First 
National  Bank  of  Wichita,  one  thousand  dollars." 
"How  much  do  you  owe?"  "I  owe  nothing,  having 
paid  all  my  bills  in  full  before  coming  to  market." 
"Do  you  carry  any  fire  insurance?"  "Yes,  four 
thousand  dollars."  "How  much  rent  do  you  pay?" 
"Twenty-five  dollars  permonth."  "How  many  goods  do 
you  sell  a  year?"  "About  fourteen  thousand  to  fifteen 
thousand  dollars  worth."  "How  large  a  bill  do  you 
wish  to  purchase  from  us?"  "About  two  thousand 
dollars."  Now,  Messrs.  Credit  Men,  during  your  inter- 
view with  me  you  have  formed  your  opinion  of  me  from 
what  I  have  said  and  from  the  way  I  look.  If  I  have 
impressed  you  as  a  truthful  man,  an  honest  man,  and 
if  your  judgment  is  not  at  fault,  you  would  be  per- 
fectly safe  in  saying  to  me :  "Mr.  Smith,  we  will  be 
pleased  to  extend  the  line  of  credit  you  ask,  and  hope 
this  is  only  the  beginning  of  many  transactions  which 
will  prove  mutually  satisfactory."  Messrs.  Credit  Men, 
if  you  will  glance  at  this  statement  of  my  affairs,  you 
will  perceive  I  am  a  first-class  risk,  provided  I  have 


228  LECTURES  ON  COMMERCE 

been  telling  you  the  truth.  In  the  first  place,  I  have 
no  indebtedness  at  present,  and  it  is  always  what  a 
merchant  oives  that  gives  him  anxiety  and  trouble; 
and  the  same  thing  applies  to  the  life  of  a  university 
student.  Secondly,  if  my  store  should  catch  fire,  I 
have  the  stock  covered  with  $4,000  insurance,  and  the 
chances  are  I  would  be  able  to  save  part  of  my  goods ; 
therefore  the  risk  in  this  direction  is  very  small. 
Thirdly,  I  am  selling  for  cash ;  therefore  I  cannot  lose 
anything  in  bad  debts.  Fourthly,  my  sales  amount 
to  over  $1,000  per  month,  and  therefore  in  sixty  days 
I  shall  have  sufficient  money  to  pay  my  bill  to  you, 
even  if  I  did  not  have  $1,000  cash  now  on  deposit  in 
my  bank. 

Now,  the  next  man  who  is  presented  to  you,  Messrs. 
Credit  Men,  is  Mr.  John  Hardup,  from  Oshkosh,  Wis., 
and  you  proceed  to  interview  in  a  like  manner  and  elicit 
the  following  information : 

ASSETS. 

Stock    on    hand $28,000 

Trusted    out 14,000 

Cash    on    hand very    small 

Total    resources $42,000 

LIABILITIES. 

Owe    bank $  7.500 

Owe    merchandise,    not    due. IS.OOO 

Owe  merchandise,   due 4,Soo 

Total     liabilities $27,000 

Net    worth $15,000 

Carry   $10,000   fire   insurance;    rent,   $100   per   month;    sales, 
$35,000  per  annum. 


THE  CREDIT  DEPARTMENT  229 

Now,  Messrs.  Credit  Men,  if  you  compare  these  two 
statements,  it  will  be  observed  that  Hardup  thinks  he 
is  worth  two  and  one-half  times  as  much  as  Smith 
($15,000  as  against  $6,000),  and  yet  I  do  not  believe 
that  anyone  of  you  would  trust  Hardup  for  a  dollar's 
worth  of  goods.  Why  ?  In  the  first  place  his  indebt- 
edness is  very  large,  and  some  of  it  is  past  due. 
Secondly,  if  fire  should  come,  he  has  but  $10,000 
insurance  on  a  stock  of  $28,000,  the  difference  being 
more  than  the  amount  he  thinks  he  is  worth.  Thirdly, 
he  is  carrying  altogether  too  large  a  stock  for  the 
business  he  is  doing.  His  sales  are  less  than  $3,000 
per  month,  and  if  he  were  unfortunate  in  collecting  his 
outstanding  accounts,  it  would  require  many  months' 
sales  to  cancel  his  present  indebtedness.  The  only 
chance  that  I  can  see  for  ]\Ir.  Hardup  to  save  himself 
from  an  inglorious  failure  is  to  have  a  going-out-of- 
business  sale  and  reduce  his  stock,  get  a  collector  to 
collect  his  outstanding  accounts  as  fast  as  possible,  and 
apply  every  dollar  toward  reducing  his  indebtedness, 
and  then  commence  on  a  smaller  scale  in  a  more  favor- 
able locality. 

I  think  I  hear  someone  say :  "How  do  you  know 
the  information  you  obtain  by  personal  interview  is 
true?  The  would-be  debtor  might  deceive  you." 
Well,  here  is  where  the  credit  man  has  to  exercise  his 
judgment.  It  is  usual  for  customers  to  give  refer- 
ences to  their  banks  and  to  other  dealers  with  whom 
they  have  had  an  account,  and  by  writing  for  this 
information  it  can  be  easily  obtained.  Then  there  are 
mercantile  agencies  who  make  it  a  business  to  collect 
information  on  the  financial  standing  and  responsibility 


230  LECTURES  ON  COMMERCE 

of  everyone  in  trade,  and  they  issue  reference  books 
which  indicate  the  capital  and  credit  of  the  parties 
reported ;  and  by  sending  to  them  one  can  obtain  a 
special  report  in  regard  to  any  particular  party. 
While  these  reports  are  not  always  infallible,  yet,  con- 
sidering how  much  these  agencies  undertake  to  do,  it 
is  surprising  that  they  render  so  acceptable  service. 

The  credit  man,  to  be  successful,  must  give  con- 
siderable attention  to  many  other  matters  to  which  the 
limit  of  this  discussion  will  prevent  even  a  reference. 

In  closing  let  us  remember  that  when  we  make  a 
credit  we  have  parted  with  something  of  value,  and  for 
which  value  is  to  be  returned  at  a  future  time;  so  we 
take  chances  on  what  time  may  do.  Of  what  it  will  do 
no  one  can  be  absolutely  certain.  There  is,  then,  a  de- 
gree of  uncertainty  which  attaches  to  all  credit  trans- 
actions, but  we  need  not  be  without  our  bearings.  The 
sailor  with  his  chart  and  compass  may  be  in  the  middle 
of  a  tempestuous  ocean,  but  he  is  not  altogether  "at 
sea."  By  making  use  of  the  aids  at  his  command  and 
the  experience  of  others  before  him  in  locating  the 
danger  spots  his  risk  is  reduced  to  a  minimum  quantity ; 
and  this  is  the  ambition  of  every  credit  man. 


BANKING  AND  INSURANCE 


THE  COMPTROLLER  OF  THE  CURRENCY. 

JAMES    H.    ECKELS,    PRESIDENT    OF    THE    COMMERCIAL 
NATIONAL  BANK,    CHICAGO. 

The  Comptroller's  office  was  created  by  an  act 
passed  in  1863.  The  duties  defined  by  the  statute 
were  that  he  should  have  the  supervision  of  banks  to 
be  organized  throughout  the  country,  known  as 
"national  banks."  These  banks  were  compelled  to 
deposit  with  the  Treasury  Department  United  States 
bonds  to  be  held  as  security  for  their  circulating  notes, 
thus  providing  a  sound  bank  currency  and  at  the  same 
time  creating  a  market  for  the  bonds. 

It  was  the  intention  of  those  who  created  the  act 
that  the  office  should  be  kept  out  of  politics.  It  was 
created  for  a  distinct  business  purpose,  having  a  close 
relation  to  the  commercial  and  financial  interests  of 
the  country,  and  the  situation  required  that  the 
Comptroller  should  be  free  from  all  political  bias, 
and  that  the  office  should  remain  outside  the  realm 
of  politics.  So  far  as  the  Comptrollers  of  the  Cur- 
rency have  been  concerned,  they  have,  as  best  they 
could  within  their  power,  kept  the  office  out  of  politics 
and  made  it  distinctly  a  business  office. 

In  accordance  with  this  idea,  the  incumbent  of  the 
office  was  to  be  appointed  by  the  President  of  the 
United  States  upon  the  suggestion  of  the  Secretary  of 
the  Treasury,  and  to  hold  the  office  for  a  period  of 
five  years,  thus  extending  it  beyond  the  incumbency  of 
the  presidential  office.     The  Comptroller  could  not  be 

233 


234  LECTURES  ON  COMMERCE 

removed  from  office  except  by  charges  filed  by  the 
President,  and  action  taken  thereon  in  the  form  of 
impeachment — the  only  office,  with  possibly  the  excep- 
tion of  the  Director  of  the  Mint,  where  removal  can- 
not be  had  except  on  charges  filed  with  the  Senate. 

There  is  a  nominal  affiliation  between  the  Treasury 
Department  and  the  office  of  the  Comptroller  of  the 
Currency,  but  the  Comptroller's  office,  differing  from 
any  other  connected  with  the  department,  does  not 
report  on  what  goes  on  within  the  Comptroller's  office, 
either  to  the  Treasurer  or  to  the  President,  nor  does 
the  Comptroller  report  either  to  the  President  or  the 
Secretary,  but  he  reports  directly  to  the  Congress  of 
the  United  States,  being  required  to  give  annually 
the  conditions  of  the  banks  as  they  are  on  a  certain 
day  prior  to  the  convening  of  Congress,  together  with 
such  recommendations  as  would,  in  his  opinion, 
improve  the  banking  conditions  of  the  country.  The 
salary  of  the  office,  like  that  attaching  to  all  positions 
under  the  government,  is  very  meager,  being  only 
$5,000  a  year ;  and  yet  there  are  a  good  many  people 
willing  to  accept  the  place. 

The  act  creating  the  national-bank  system  and  the 
office  of  Comptroller  sets  forth  what  shall  be  done  to 
create  a  national  bank.  It  gives  the  number  of  persons 
who  may  take  a  charter  (not  less  than  five),  and  fixes 
the  minimum  amount  of  capital  for  such  banks,  that 
being  not  less  than  $50,000  in  cities  of  not  over  6,000 
inhabitants,  and  from  $100,000  to  $200,000  in  cities 
of  larger  size. 

The  office  in  its  organization  had  three  or  four 
departments.     The  Organization  Department  receives 


COMPTROLLER  OF  THE  CURRENCY         235 

the  applications  for  the  creation  of  a  national  bank. 
The  application  must  set  forth  the  names  of  those  who 
are  seeking  the  charter,  the  amount  of  capital,  the  popu- 
lation of  the  city,  etc.  When  the  application  is 
received,  the  Comptroller  examines  it  to  ascertain 
whether  or  not  the  persons  applying  should  be  granted 
a  charter;  and  if,  in  his  judgment,  a  charter  should 
not  be  given,  it  is  not  granted.  This  is  not  the  result 
of  any  statutory  requirement,  but  a  course  which  the 
office  has  assumed  of  itself  without  any  question  as  to 
its  right.  The  great  powers  of  which  the  incumbent 
of  the  office  is  possessed  are  powers  which  he  has 
assumed  rather  than  received  by  legislative  enactment, 
and  their  assumption  and  continued  possession  come 
largely  from  the  fact  that  the  banking  institutions  over 
which  he  presides  realize  the  importance  of  the  Comp- 
troller's hands  being  upheld,  if  the  banks  are  to  be 
healthful  and  sound  institutions. 

The  bank,  having  been  granted  a  charter,  is  given 
a  name,  that  which  the  incorporators  select  always 
being  given,  unless  at  that  time  or  prior  the  name 
suggested  has  been  used  by  another  bank.  The  bank, 
having  then  deposited  with  the  Treasurer  of  the  United 
States  the  minimum  amount  of  bonds,  may  now  take 
out  circulation.  There  have  been  a  good  many  banks, 
especially  in  the  larger  cities  requiring  a  minimum 
amount  of  $50,000  bonds,  which  have  never  taken  out 
any  circulation  whatever.  I  think  there  are  few  banks 
that  have  the  maximum  amount  of  circulation  which 
the  law  permits  them.  This  is  on  the  principle  tha?t 
there  is  not  any  profit  in  the  circulation,  and  that  it  is 
better  to  leave  the  bonds  without  taking  out  the  cir- 


236  LECTURES  ON  COMMERCE 

culation,   paying  the  tax,   and  going  to  the  general 
trouble  of  having  the  circulation  issued. 

After  the  bank  has  been  established,  it  comes  under 
the  active  supervision  of  the  Comptroller  of  the  Cur- 
rency. Under  the  act  he  is  empowered,  subject  to  the 
approval  of  the  Secretary  of  the  Treasury  (and  in  that 
alone  has  the  Secretary  any  control  over  the  Comp- 
troller's office,  exercising  the  same  right  that  the 
Senate  of  the  United  States  does  over  the  appointment 
of  the  President  of  the  United  States),  to  appoint  a 
number  of  men  to  the  office  of  National  Bank 
Examiners.  Their  duties,  under  the  direction  of  the 
Comptroller  of  the  Currency,  are  to  visit  the  banks  in 
the  districts  to  which  they  are  appointed.  Here  again 
comes  into  play  the  power  assumed  on  the  part  of  the 
Comptroller,  for  he  makes  it  the  duty  of  the  examiner, 
not  only  to  see  that  the  capital  stock  is  intact,  but  to 
see  further  that  all  the  methods  of  banking  employed 
in  the  bank  are  of  a  character  that  insures  not  only 
safety  to  the  public,  but  benefit  to  the  stockholder.  As 
a  result,  the  examiner  not  onlv  sees  that  all  the  cash  is 
there,  but  he  takes  upon  himself  the  duty  of  seeing  to 
it,  as  far  as  he  can,  that  the  paper  held  by  the  bank  is 
genuine,  that  the  notes  are  of  the  value  that  they 
represent  themselves  to  be,  and  that  many  other  details 
are  properly  administered.  Thus  it  happens  that 
when  an  inspector  comes  into  a  bank  and  finds  an  old- 
fashioned  method  of  bookkeeping  employed,  he  reports 
that  fact;  he  also  ascertains  the  salary  of  the  various 
officials,  the  amount  of  rent  paid,  and  all  other  details 
which  enter  into  the  conduct  of  a  bank.  The  same 
method   of   examination    is   pursued   whether   in   the 


COMPTROLLER  OF  THE  CURRENCY         237 

National  City  Bank  of  New  York,  with  a  capital  of 
$10,000,000,  or  in  the  smallest  bank  of  medium  capital. 
The  great  strength  of  the  national-bank  system,  the 
great  source  of  its  influence  over  the  banking  system 
of  the  country  since  its  establishment,  has  arisen  from 
the  very  uniformity  of  the  control  exercised  in  the 
Comptroller's  office,  bringing  about  in  the  individual 
banks,  whether  in  Chicago,  New  York  or  elsewhere,  the 
same  method  of  bookkeeping  and  the  same  details  which 
are  necessary  to  the  careful  management  of  a  bank. 

The  examiner's  report  is  made  to  the  Comptroller 
of  the  Currency,  and  thence  sent  to  the  Department 
of  Reports,  where  there  is  a  large  force  of  clerks  to 
examine  these  reports,  see  what  is  defective  in  the  bank, 
and  compare  with  the  previous  report.  Upon  the  basis 
of  these  reports  the  Comptroller  of  the  Currency 
writes  to  the  president  or  directors  of  the  bank,  sug- 
gesting steps  to  be  taken  to  strengthen  the  position  of 

the  bank. 

There  is  another  division  of  the  Comptroller's  office, 
known  as  the  Redemption  Department,  where  mutilated 
and  worn-out  bank  notes  and  the  notes  of  banks  which 
have  gone  into  liquidation  are  redeemed.  Another 
department,  known  as  the  Issuing  Department,  issues 
to  the  banks  the  amount  of  bank  notes  to  which  they 
are  entitled.  Until  the  recent  Bank  Act,  during  the 
administration  of  President  McKinley,  the  amount  of 
circulating  notes  to  be  issued  on  the  deposit  of  bonds 
was  90  per  cent,  of  the  par  value  of  the  bonds.  But 
under  the  present  act,  the  total  value  of  the  bonds  may 
be  issued  upon  the  2  per  cent,  bonds  which  were  the; 
refunding  bonds  of  the  last  administration. 


238  LECTURES  ON  COMMERCE 

As  to  whether  a  bond-secured  circulation  is  a  wise 
circulation  there  are  a  good  many  suggestions.  Safety- 
does  not  enter  into  the  question  so  long  as  the  bonds 
of  the  United  States  continue  good;  which  will  be  as 
lone  as  United  States  revenues  are  collected;  which 
will  be  as  long  as  the  people  are  able  to  pay  internal- 
revenue  taxes  or  duties  on  imported  goods. 

It  has  been  suggested  that  the  method  of  issuing 
bank-note  currency  is  not  desirable,  because  it  gives 
to  the  creditor  of  the  bank  who  is  a  note-holder  an 
advantage  over  the  creditor  who  is  simply  a  depositor, 
in  making  the  former  preferred  over  the  latter. 
Under  the  existing  bond  system  the  note-holder  is  a 
preferred  creditor,  because  before  the  bank  gets  started 
into  active  operation  so  many  of  its  assets  are  taken 
in  the  shape  of  bonds  and  deposited  with  the  Treasurer 
of  the  United  States  to  secure  bank  notes,  these  bonds 
being  sold  in  case  of  failure  of  the  bank,  and  the 
amount  received  from  the  sale  being  used  to  pay  the 
claim  of  the  preferred  creditor,  who  holds  the  notes 
of  the  bank.  In  case  there  is  not  a  sufficient  amount 
of  money  received  from  the  bonds  to  pay  the  notes, 
the  act  provides  that  the  note-holder  shall  have  a 
prior  lien  on  the  other  assets  of  the  bank,  out  of  which 
he  shall  be  reimbursed  before  the  payment  is  made 
to   depositors. 

Another  objection  which  has  always  been  found 
has  not  arisen  from  the  idea  that  the  safety  could  be 
improved,  but  is  that  with  a  note  circulation  amounting 
to  only  90  per  cent.,  or  even  to  par  on  the  deposited 
bonds,  the  premium  on  the  bonds  over  their  par  value 
is  always  tied  up.     When  the  banks  were  allowed  cir- 


COMPTROLLER  OF  THE  CURRENCY         239 

dilation  equal  to  90  per  cent,  of  the  par  value  of  the 
bonds  and  the  bond  was  selling  at  100  to  115,  there 
was  always  twenty-five  dollars  locked  up,  not  avail- 
able for  loaning  purposes ;  and  even  at  present  there  is 
still  eleven  dollars  taken  out  of  the  active  channels  of 
business  and  permitted  to  lie  in  Washington,  a  source 
of  profit  neither  to  the  bank  nor  to  Congress. 

So  there  are  some  very  valid  objections  to  the 
provisions  for  issuing  notes  by  the  banks,  and  I  take 
it  that  as  we  make  progress  in  the  field  of  finance  we 
shall  come  to  understand  what  is  the  proper  basis  for 
a  bank-note  circulation,  and  we  shall  not  be  surprised 
if  the  bank-note  issue  shrinks  to  nothing,  because  it 
is  more  profitable  to  sell  the  bonds  than  to  hold  them 
as  a  basis  for  note  issue.  When  a  bank-note  currency 
is  based  upon  a  security  which  varies  in  market  value, 
no  matter  what  may  be  the  monetary  needs  of  the 
country,  if  there  is  more  profit  in  selling  the  bonds  • 
than  in  taking  out  notes  thereon,  the  bonds  will  be  \ 
sold. 

If  the  bank  impairs  its  capital,  the  Comptroller  of 
the  Currency  notifies  the  directors  and  calls  upon 
them  to  make  orood  the  deficit.  In  case  thev  fail  to 
do  so,  the  Comptroller  declares  the  bank  insolvent  and 
places  it  in  the  hands  of  a  receiver.  In  this  the 
Comptroller  is  fortified  by  the  decisions  of  the  Supreme 
Court  of  the  United  States.  His  judgment  must 
control.  When  he  declares  that  a  bank  is  insolvent, 
there  is  no  power  in  the  courts  of  the  United  States 
to  gainsay  that,  and  he  is  clothed  with  the  right  to 
appoint  a  receiver  to  take  charge  of  the  assets.  I 
remember  an  instance,  when  I  was  Comptroller,  of  a 


Z40  LECTURES  ON  COMMERCE 

bank  in  Tacoma  which  my  examiner  reported  to  me 
as  having  a  reserve  of  only  6  per  cent,  whereas  the 
requirement  was  15  per  cent.,  as  it  is  in  all  but  five 
or  six  large  cities,  known  as  reserve  cities,  where  25 
per  cent,  is  required.  I  ordered  the  examiner  to 
declare  the  bank  insolvent.  The  directors  got  out 
an  injunction,  but  the  judge  declared  that,  while  he 
thought  it  was  all  wrong  for  the  Comptroller  of  the 
Currency  to  have  more  power  than  the  President  and 
Congress,  he  could  not  do  anything  but  let  him  take 
charge  of  the  bank  if  he  so  desired.  This  power 
vested  in  the  Comptroller  requires  impartial  action 
over  all  banks  that  come  under  his  control. 

The  office  differs  from  any  other  in  Washington 
because  there  is  absolutely  no  routine.  Every  case 
is  an  individual  case,  and  the  Comptroller  must  exer- 
cise individual  judgment  in  every  instance.  The  great 
responsibility  that  attaches  to  the  office  is  due  to  the 
fact  that  the  bank  is  the  one  necessity  in  every  com- 
munity that  afTects  every  business  enterprise.  The 
failure  of  the  bank  takes  out  of  the  business  channels 
of  the  community  more  or  less  of  the  funds,  and 
curtails  the  credit  of  the  community.  That  was  par- 
ticularly so  during  the  panic  of  1893.  During  the 
thirty  years  of  the  existence  of  the  office  prior  to  my 
incumbency  there  had  been  182  failures  of  national 
banks.  During  the  first  two  weeks  I  was  in  office 
there  were  165  failures.  The  result  of  the  failure  of 
so  many  banks  was  seriously  to  embarrass  many  com- 
munities, and  the  efifect  was  very  far-reaching.  I  contin- 
ued to  give  a  bank  opportunity  to  do  business  if  I  found 
its    managment    sound    and    honest.     It    would    be 


COMPTROLLER  OF  THE  CURRENCY         241 

assumed  that  a  bank  having  failed  once,  and  having 
suspicion  attached  to  it.  could  never  succeed  in  obtain- 
ing the  confidence  of  the  pubhc.  I  tried  the  experi- 
ment, laying  down  certain  conditions  which  were  to 
be  complied  with  on  the  part  of  the  directors  of  the 
bank.  Of  the  165,  I  thus  opened  115,  and  100  of 
these  proved  to  be  very  successful  institutions.  But 
there  were  many  banks  that  did  not  fail,  but  were 
close  to  the  point,  and  the  question  with  the  Comp- 
troller was  whether  to  close  them  at  once  or  run  the 
risk  of  their  failure  with  ensuing  disaster  to  the  com- 
munity. I  remember  one  instance  where  I  considered 
for  a  long  time  the  advisability  of  closing  a  prominent 
bank  in  the  Northwest.  The  institution  had  enjoyed 
high  credit,  but,  because  of  investing  in  notes  based 
on  land  booms  in  the  neighborhood,  the  credit  was  seri- 
ously impaired.  The  examiner  insisted  that  the  bank 
should  be  closed,  but  I  felt  that  I  should  take  the  risk. 
However,  I  put  on  it  an  assessment  of  considerable 
size.  ]Many  of  the  stockholders  came  to  see  me,  and 
they  finally  concluded  to  pay  the  assessment,  and  that 
bank  is  now  the  largest  in  Minnesota. 

As  a  result  of  bad  banking  or  mistaken  banking, 
banks  are  very  likely  to  get  themselves  loaded  up  with 
assets  not  easily  realizable,  and  when  the  pinch  comes 
they  fail  and  go  into  the  hands  of  a  receiver.  The 
liquidation  of  these  assets  is  not  an  easy  problem, 
especially  as  the  law  requires  that  the  receiver  shall 
recommend  what  shall  be  done  with  this  or  that  asset, 
that  the  Comptroller  shall  approve,  and  that  the 
district  court  shall  enter  a  decree  authorizing  the  sale. 

While  it  is  provided  that  the  bank  shall  not  loan 


242  LECTURES  ON  COMMERCE 

upon  real  estate,  a  good  many  banks  get  such  security 
by  making  a  loan  and  then  taking  additional  security 
in  the  form  of  a  mortgage.  I  found  in  the  failure 
of  banks  a  good  deal  of  such  paper.  There  are  many 
assets  of  a  strange  character.  At  one  time  I  had  a 
full  equipment  for  an  opera  house.  I  had  in  a 
Dakota  town  a  butcher  shop.  I  had  any  amount  of 
live  stock.  I  had  one  trotting  horse  which  sold  for 
$10,000.  In  Puget  Sound  a  certain  bank  had  as  part 
of  its  assets  enough  cans  to  can  a  large  portion  of 
the  salmon  caught  in  Columbia  river.  And  there  is 
hardly  a  thing  you  could  name,  from  an  article  of 
wearing  apparel  to  a  large  manufactory,  that  at  some 
time  or  other  does  not  in  this  way  get  into  the  hands 
of  the  Comptroller. 


THE  METHODS  OF  BANKING. 

JAMES    H.     ECKELS,    PRESIDENT    OF    THE    COMMERCIAL 
NATIONAL   BANK,    CHICAGO. 

Within  the  last  few  years  the  methods  of  banking 
have  been  much  improved,  not  only  in  the  large  cities, 
but  also  in  the  country,  all  of  which  has  come  about, 
not  as  the  result  of  any  law,  but  through  the  business 
instinct  and  judgment  of  those  who  have  had  to  do, 
not  only  directly  with  the  banking  interests,  but  also 
with  the  general  business  interests  of  the  country. 
Improvement  has  become  more  noticeable  within 
the  last  few  years.  Even  the  smallest  bank  now 
undertakes  to  exercise  the  same  care  and  attention  to 
details  of  bookkeeping  and  to  details  of  information 
as  does  the  large  city  bank,  where  the  transactions  are 
very  much  larger,  and  the  interests  conserved  are  of 
much  greater  importance. 

The  basis  of  safe  banking  is  the  acquiring  of  a 
proper  knowledge  of  credit,  and  the  acquiring  of  such 
knowledge  in  this  country  is  much  more  difficult  than 
in  older  countries.  Probably  this  is  because  in  this 
country,  with  so  wide  a  range  of  territory  and 
such  possibility  of  changing  business  occupations, 
there  is  not  the  same  knowledge  continuously  at  hand 
of  those  who  are  asking  credit  as  in  older  countries. 
In  Scotland,  where  the  best  banks  have  been  developed, 
it  is  an  easy  thing  to  obtain  continuous  information  on 
the  credit  of  any  who  may  ask  it.  That  arises  from 
the  fact  that  the  people  in  a  community  in  Scotland 

243 


244  LECTURES  ON  COMMERCE 

change  very  little.  The  same  business  is  carried  on 
from  one  generation  to  another,  and  the  result  is  that 
the  banks  in  Scotland  have  a  continuous  knowledge  of 
the  antecedents  of  those  employed  in  a  business.  It 
is  quite  different  in  this  country,  because  of  lack  of 
antecedent  knowledge,  and  also  from  the  fact  that 
there  is  not  the  continuous  carrying  on  of  the  same 
firm  from  generation  to  generation.  In  time  I  think 
that  thing  will  rectify  itself;  but  at  present  the  greatest 
difficulty  which  confronts  a  banker  is  to  know  how 
much  credit  to  extend  to  a  man  in  business,  when  to 
extend  it,  and  when  to  curtail  it.  The  necessity  of 
such  knowledge  is  essential  to  making  a  good  banker. 
The  too  general  extension  of  credit  leads  to  over- 
speculation,  with  the  result  that  in  time  the  bank 
which  has  over-extended  credit  not  only  becomes  the 
means  of  causing  the  speculator  to  come  to  grief,  but 
also  brings  suffering  upon  the  entire  community. 

At  present  the  banks  must  rely,  to  some  extent  at 
least,  on  the  mercantile  agencies  for  information  on 
the  status  of  men  engaged  in  business;  but  these 
reports  have  been  found  deficient  in  that  they  are  so 
general  in  character  and  so  limited  in  giving  the 
information  which  is  essential  to  forming  a  judgment 
as  to  the  extension   of  credit. 

The  result  is  that  several  banks  of  importance  have 
what  is  known  as  a  credit  department.  This  depart- 
ment is  in  charge  of  one  or  more  men  whose  duty 
consists  in  ascertaining  specifically  what  the  financial 
condition  of  a  man  is,  what  his  business  habits  are, 
and  what  his  record  is  for  financial  integrity. 

The  result  is  that  banks  today  have  better  equip- 


THE  METHODS  OF  BANKING  245 

ment  for  judging  credit  than  ever  before.  This  is 
extended  to  country  banks  and  from  city  to  city 
through  the  interchange  of  information.  During  the 
period  of  greater  plethora  of  money,  the  country  bank 
has  been  compelled  to  abandon  a  practice  which  char- 
acterized its  banking  prior  to  1893,  o^  merely  loaning 
money  to  those  engaged  in  local  business,  and  as  a 
result  representatives  of  country  banks  from  this  sec- 
tion of  the  country,  and  by  correspondence,  even  from 
the  Pacific  Coast,  come  asking  to  buy  commercial 
paper.  Thus  instead  of  using  their  funds  at  home 
they  use  their  funds  which,  under  existing  circum- 
stances, cannot  be  used  at  home,  in  buying  commercial 
paper.  The  result  has  been  the  necessity  of  knowing 
something  more  of  credit  than  heretofore.  A  man 
comes  into  a  city  bank  and  he  gives  as  reference  some 
firm  in  Chicago,  New  York,  St.  Louis,  or  elsewhere. 
You  would  be  quite  surprised  if  you  knew  the  changes 
that  have  come  about  in  the  banks  of  this  city. 
Instead  of  their  business  being  bounded  by  the  city  of 
Chicago  or  the  state  of  Illinois,  some  of  them  carry 
on  business  with  the  East  and  with  European  countries. 
This  has  come  about  as  a  result  of  a  change  on  the 
part  of  the  business  men  of  the  country.  At  a  time 
when  the  banker  occupied  an  overpowering  influence 
in  the  country,  the  business  man  did  business  directly 
with  his  own  banker;  but  as  the  banker's  business 
has  increased  and  the  funds  at  his  disposal  have 
increased,  relations  have  changed.  No  one  thinks  the 
banker  is  doing  him  a  favor  by  loaning  money,  but 
the  banker  feels  that  the  borrower  is  favoring  him  by 
his  willingness  to  come  and  ask  for  money  and  pay  a 
rate  of  four  per  cent. 


246  LECTURES  ON  COMMERCE 

The  business  men  in  the  larger  firms  do  not  borrow 
direct  from  the  bank,  but  that  is  all  delegated  to 
commercial  note  brokers.  Such  firms  as  Franklin 
MacVeagh  &  Co.,  C.  M.  Henderson  &  Co.  (and  I 
might  enumerate  two-thirds  of  the  larger  firms  of 
Chicago  and  elsewhere),  do  not  borrow  of  the  bank 
directly,  but  they  go  to  a  man  whose  business  it  is 
to  buy  commercial  paper.  They  either  sell  him  the 
paper  or  pay  him  a  commission  to  sell  the  paper  for 
them.  The  result  is  that  the  firm. do  not  know  whether 
their  paper  is  in  the  Commercial  National  Bank  of 
Chicago  or  the  First  National  Bank  of  Boston,  or  the 
National  Bank  of  Philadelphia.  They  get  the  check 
from  the  note  broker,  and  when  the  note  becomes  due 
they  are  notified  by  the  institution  to  which  the  broker 
has  sold  the  paper  that  the  amount  is  due  on  such  a 
date. 

The  result  has  been  beneficial  in  many  ways.  Not 
the  least  has  been  the  growth  of  the  idea  that  the 
country  in  its  best  interests  is  an  entirety,  and  the 
sphere  of  the  banker  is  not  to  be  confined  to  a  single 
community,  but  when  he  has  a  plethora  of  funds  and 
no  demand  in  his  community,  that  it  is  of  benefit  to 
the  community  to  transfer  the  credit  he  has  to  sell  to 
another  part  of  the  country  where  there  is  not  a 
plethora  of  funds  and  the  money  is  needed.  So  the 
banker  of  any  small  community,  not  finding  his  funds 
needed  at  home,  instead  of  letting  them  be  a  drug  to 
him,  is  enabled  to  fill  a  vacuum  which  exists  in  one 
of  the  large  commercial  centers. 

The  other  benefit,  of  great  importance  to  the  banker 
himself,  is  this :     One  of  the  things  that  troubles  the 


THE  METHODS  OF  BANKING  247 

banker  is  how  to  hs-ve  at  certain  seasons  of  the  year 
enough  money  on  hand  to  meet  the  demands  of  his 
own  depositors  and  also  those  of  his  borrowers.  Such 
questions  always  arise  when  the  bank  has  as  borrow- 
ing customers  only  its  depositing  customers.  The 
moment  money  becomes  tight,  the  depositor  wants 
to  withdraw  his  funds  and  also  to  borrow.  Especially 
in  the  spring  and  fall  of  the  year  the  banker  finds  he 
is  embarrassed,  for  the  existing  banking  laws  require 
the  bank  to  maintain  a  fixed  reserve,  and  this  restricts 
his  power  to  loan;  but  under  the  system  of  buying 
commercial  paper  and  timing  the  maturity  of  that 
paper,  he  is  relieved  of  a  good  deal  of  this  embarrass- 
ment. At  those  seasons  when  money  is  tight,  he  can- 
not demand  of  his  depositing  customer,  who  is  also 
his  borrowing  customer,  to  pay  up.  If  he  should, 
the  customer  would  say:  "If  you  demand  this  pay- 
ment of  me,  I  shall  have  to  go  to  some  bank  where 
they  are  not  only  willing  to  have  me  deposit,  but 
where  they  will  be  willing  to  loan  me  money  at  any 
time,  and  instead  of  calling  on  me  to  pay  at  the  time 
I  need  money,  they  will  give  me  additional  credit." 

But  that  is  not  the  situation  with  a  banker  who  buys 
from  a  commercial  note  broker.  The  note  maker 
is  not  a  depositor,  but  an  independent  person  with 
wdiom  the  only  relation  that  exists  is  that  the  bank  has 
bought  from  a  third  party  some  paper  which  must  be 
paid  on  maturity  without  any  objection;  and  the  person 
who  sells  his  paper  through  a  broker  never  expects 
to  get  an  extension  and  never  does  get  it. 

So  every  bank  carries  a  certain  amount  of 
"boughten"    paper    with    the    expectation    that    when 


248  LECTURES  ON  COMMERCE 

these  periods  of  tight  money  come  there  will  be  among 
the  bills  and  discounts  notes  which  are  expected  to 
be  paid  at  maturity,  and  which  as  a  rule  are  paid  at 
maturity. 

There  are  some  bankers  who  think  there  is  a  risk 
run  in  extending  credit  beyond  the  community  where 
the  bank  is  located ;  but  by  careful  study  of  credit  and 
by  care  in  buying  there  is  not  so  much  risk  as  in  a 
great  many  of  the  transactions  carried  on.  The  losses 
incurred  have  not  been  from  any  purchased  paper  of 
firms  distant  from  Chicago  or  in  Chicago;  but  the 
losses  have  come  from  loaning  money  to  customers 
who  are  also  depositing  customers,  and  where  renewals 
are  frequent  and  a  situation  arises  where  the  bank, 
having  loaned  the  customer  so  much  money,  feels,  in 
order  to  save  the  customer  from  failure,  that  an  addi- 
tional loan  is  necessary:  and  in  a  good  many  cases  the 
additional  dollar  loaned  has  not  saved  the  customer, 
but  has  meant  so  much  loss  to  the  bank. 

I  have  thought  that  a  bank  organized  for  the 
purpose  of  receiving  deposits,  and  paying  a  higher  rate 
of  interest  than  prevails  in  the  average  bank,  but  which 
would  not  loan  a  single  dollar  of  its  money  to  the 
customers,  but  which  only  bought  commercial  paper, 
would  be  a  very  paying  institution.  Since  I  have 
been  at  the  Commercial  National  Bank  we  have  bought 
in  four  years  some  $70,000,000  of  commercial  paper, 
and  of  that  we  have  had  only  one  note  not  paid  at 
maturity,  although  it  was  paid  later;  and  one  of 
$10,000  on  which  there  was  a  loss  of  $2,000. 

These  new  methods  have  all  been  for  the  betterment 
of  banking.     The  enlargement  of  the  sphere  of  the 


THE  METHODS  OF  BANKING  249 

individual  bank  throughout  the  country  has  some- 
times looked  as  if  it  might  be  the  means  of  too  much 
inflation  of  credit;  yet  the  result  so  far  has  been  of 
great  benefit.  The  note  broker  himself,  although  he 
does  not  indorse,  first  makes  an  examination  of  the 
credit  that  ought  to  be  extended  to  a  customer,  and 
satisfies  himself  that  there  are  no  risks.  I  was  talking 
with  a  broker  and  he  told  me  his  average  sales  were 
over  $90,000,000  a  year,  and  that  in  seven  years  he 
had  seen  the  failure  of  but  two  institutions  from  which 
he  had  purchased  paper. 

Through  the  encouragement  on  the  part  of  banks 
that  buy  paper  too  readily  and  make  easy  the  floating 
of  paper  of  merchants,  there  is  danger  that  a  great 
many  men  in  smaller  places  will  get  more  money  than 
they  can  use  in  successful  ventures.  But  taken  all 
through,  the  new  departures  in  the  methods  by  which 
a  bank  acquires  its  loans  and  discounts  have  been  very 
successful. 

In  the  large  banks  another  thing  which  has  operated 
beneficially  is  the  strict  adherence,  especially  since 
1893,  to  the  provisions  of  the  National  Bank  Act 
prohibiting  loans  on  real  estate.  Not  that  real  estate 
is  not  a  sure  security,  but  money  thus  invested 
is  not  easily  accessible.  Prior  to  1893  there  was 
scarcely  a  community  of  any  size  that  did  not  go 
through  that  delightfully  exhilarating  period  of  a  boom 
in  real  estate.  Cities  were  being  built  all  over  the 
country  by  laying  out  lots  in  cornfields  and  selling 
them  at  extravagant  prices.  Ultimately  the  notes 
received  for  these  lots  found  their  way  into  national 
and  other  banks,  with  the  result  that  the  depositor, 


250  LECTURES  ON  COMMERCE 

frightened  by  the  thought  that  we  were  going  to  have 
a  deluge  of  depreciated  currency,  asked  for  his  money ; 
but  when  he  wanted  it  the  banks  could  not  immediately 
convert  these  notes,  the  basis  of  which  was  the  real 
estate  for  which  they  had  been  given  in  purchase,  and 
consequently  a  great  many  banks  which  were  to  an 
extent  solvent  were  compelled  to  close  their  doors, 
though  some  of  them  afterward  reopened.  In  the 
Comptroller's  office  it  has  even  been  questioned  whether 
banks  ought  to  have  a  considerable  portion  of  their 
assets  tied  up  in  stocks  and  bonds.  There  is  not,  as  a 
rule,  much  purchase  of  stock  by  the  banks,  but  there 
is  of  bonds.  The  experience  of  1893,  and  of  every 
period  of  financial  depression  and  demand  for  money 
on  the  part  of  depositors,  has  taught  the  banks  that 
the  one  asset  which  was  quickly  convertible  was  com- 
mercial paper.  In  1893,  during  the  period  of  greatest 
stringency  (May  to  August),  reports  showed  that 
deposits  were  reduced  some  $200,000,000;  the  stocks 
and  bonds  remained  practically  unchanged;  the  real- 
estate  holdings  remained  about  the  same;  but  the 
item  which  showed  that  it  was  convertible  on  maturity 
was  the  commercial  paper  which  represented  actual 
value.  So  if  any  of  you  engage  in  the  banking  busi- 
ness, you  will  find  that  the  item  which  will  give  you 
the  greatest  satisfaction  in  a  money  stringency  will 
be  the  items  of  loans  and  discounts  represented  by 
commercial  paper;  and  the  item  which  will  give  you 
the  most  trouble  will  be  real  estate,  especially  if  it 
is  in  a  city. 

There  are  means  provided  for  making  all  the  loans 
that  are  necessary  on  real-estate  investment.     I  can 


THE  METHODS  OF  BANKING  251 

remember  when  the  loaning  of  money  was  simply  a 
loan  by  one  farmer  to  another.  But  all  that  sort  of 
thing  has  changed  because  of  better  business  methods. 
There  is  not  now  so  much  loaning  by  a  farmer  directly 
to  his  neighbor,  and  there  is  no  institution  now  where 
the  farmer  brings  in  the  actual  cash ;  but  it  is  all  done 
by  loan  and  mortgage,  for  example,  by  the  state  bank- 
ing institutions,  which  are  permitted  to  loan  on  real 
estate.  The  result  has  been  to  benefit  the  man  who 
borrows  on  real  estate,  for  he  gets  a  lower  rate  of 
interest,  and  a  longer  term  for  his  loan.  Not  only 
is  it  cheaper  for  him,  but  none  of  that  ought  to  be 
done  in  a  commercial  bank  because  such  security  is 
not  readily  convertible. 

A  feature  which  has  been  developed  within  the 
last  few  years  has  been  the  establishment  of  large 
banks — something  more  than  merely  local  institutions 
in  the  sense  that  a  man  comes  in  to  borrow  money  to 
put  into  his  business  for  a  limited  time.  The  great 
banks  go  farther  than  that.  They  finance  great 
undertakings — railroads  and  manufactures — and  that 
accounts  to  a  considerable  extent  for  the  consolidation 
of  banking  institutions.  This  has  come  about  by  the 
demands  of  business.  Take,  for  example,  the  First 
National  Bank  of  New  York  or  the  National  City 
Bank  of  New  York.  They  not  only  do  the  ordinary 
banking  business  which  the  average  bank  does,  but 
they  manage  great  business  undertakings  for  the  gov- 
ernment ;  for  example,  in  the  handling  of  the  payment 
to  Spain  for  the  valuable  acquisition  in  the  Pacific. 
I  remember  a  few  years  ago  when  the  First  National 
Bank  bought  a  railroad.     They  did  not  take  the  rail- 


252  LECTURES  ON  COMMERCE 

road  for  a  debt,  but  bought  it  outright,  and  sold  it 
again,  with  the  result  that  the  profit  on  hand,  which  it 
would  have  taken  a  great  many  years  to  have  made 
by  ordinary  banking,  amounted  to  "29  per  cent,  to  each 
individual  stockholder. 

And  so  more  and  more,  as  time  goes  on,  the 
banking  institutions  of  the  country  will  develop  into 
institutions  which  are  organized  in  such  a  way  as  to 
utilize  the  available  credits  of  the  country  for  the 
profit  of  the  business  interests  of  the  country;  and  I 
should  not  be  surprised  if  a  decade  from  now  those 
institutions  which  we  now  look  on  as  great  institu- 
tions will  be  considered  small  because  this  country's 
resources  will  be  so  increased.  I  remember  when  one 
of  the  large  banks  of  New  York  considered  itself 
fortunate  with  $18,000,000.  It  now  has  deposits  of 
over  $170,000,000,  with  assets  of  something  like 
$210,000,000,  and  a  surplus  of  $13,000,000. 

All  this  has  come  about  through  the  increased 
riches  of  the  country,  on  the  one  hand,  and  through 
increased  banking  on  the  other.  The  great  thing  in 
a  community  is  to  know  how  to  make  the  bank 
available  for  business  needs.  Educating  the  people 
up  to  the  habit  of  depositing  in  the  banks  is  the 
greatest  good  that  can  come  to  a  community,  because 
every  time  that  a  bank  receives  a  dollar  that  dollar 
becomes  an  efficient  dollar  which,  through  the  use  of 
checks,  is  able  to  perform  not  only  a  single  transaction 
but  many  transactions.  Where  everyone  in  a  com- 
munity goes  around  with  cash  in  his  pockets,  every 
transaction  is  carried  on  by  money  from  hand  to  hand, 
which  is  not  only  expensive  but  bad,  because  it  curtails 


THE  METHODS  OF  BANKING  253 

transactions  of  the  community  to  the  actual  amount  of 
cash  in  the  community,  instead  of  permitting  it  to 
go  through  the  bank  to  be  converted  into  credit  which 
becomes  an  efficient  agency  for  carrying  on  a  great 
many  business  enterprises  which  would  otherwise  fail 
for  want  of  means. 


INVESTMENTS. 

D.  R.  FORGAN,  VICE-PRESIDENT  OF  THE  FIRST  NATIONAL 

BANK,    CHICAGO. 

There  is  a  sense  in  which  all  business  enterprises 
are  investments.  To  build  a  ship  or  a  railroad,  to 
start  a  store  or  a  factory,  to  pay  wages  or  place  an 
advertisement  —  to  do  anything,  in  short,  which 
involves  an  outlay  of  money  for  the  purpose  of 
increasing  it — is  an  investment  of  capital.  That  is 
the  sense  in  which  political  economists  use  the  word, 
but  in  common  use  it  has  a  more  restricted  meaning, 
viz. :  the  outlay  of  money  in  the  purchase  of  property 
or  securities  which  are  expected  to  yield  a  sure  and 
regular  income  without  further  effort  on  the  part  of 
the  investor.  This  discussion  will  be  limited  to  what 
may   be   included    in   that    definition. 

At  the  outset  it  may  be  well  to  have  a  clear  view 
as  to  what  funds  are  available  for  investment;  or 
to  answer  the  question  so  often  asked  as  to  where  all 
the  money  comes  from  to  pay  for  the  enormous  issues 
of  securities  which  are  constantly  being  brought  out. 
A  recent  writer  on  this  subject  begins  with  the  state- 
ment that  the  bank  deposits  of  the  United  States 
increased  in  the  seven  years  from  1893  to  1900  by 
$4,000,000,000,  and  that  "the  effort  to  place  this 
enormous  amount  of  new  capital  has  disorganized 
the  entire  field  of  investment."  This  is  not  correct. 
If  the  author  had  looked  deeper,  he  would  have  seen 
that  the  increase   in   loans  had  kept  pace   with  the 

254 


INVESTMENTS  255 

increase  of  deposits,  and  that  the  banks  had  no  greater 
percentage  of  reserves  in  1900  than  in  1893.  In  fact, 
about  the  time  this  pamphlet  appeared  the  banks  in 
New  York  were  under  their  legal  reserves,  and  money 
was  bringing  good  rates  all  over  the  country  because 
it  was  scarce.  Only  such  portion  of  the  increase  of 
deposits  as  represented  the  savings  of  the  masses,  or 
the  surplus  earnings  of  commercial  enterprises,  was 
available  for  investment.  The  remainder,  which 
constituted  by  far  the  larger  part  of  the  deposits, 
represented  only  expansion  of  credit,  and  was  not 
available  for  permanent  investment.  It  is  a  common 
error  to  consider  bank  deposits  as  "money  in  the 
bank,"  whereas  they  are  largely  composed  of  credits 
on  a  ledger.  When  a  banker  lends  a  customer  $100,000 
he  takes  the  customer's  note  and  credits  the  customer's 
account' with  the  proceeds.  The  transaction  increases 
both  the  deposits  and  loans  by  $100,000,  but  adds 
nothing  to  the  "money  in  the  bank."  Even  when  the 
customer  draws  his  checks  upon  the  credit,  it  does 
not  necessarily  follow  that  the  money  in  the  bank  is 
reduced,  for  his  checks  either  go  to  the  credit  of 
another  customer  of  the  bank  or  they  find  their  way 
into  another  bank  and  are  offset  by  similar  trans- 
actions in  that  bank.  This  credit  of  $100,000  created 
by  the  banker  discounting  the  note  of  his  customer 
performs  all  that  actual  money  can  perform,  and  prac- 
tically adds  that  amount  to  the  resources  of  the  busi- 
ness community  while  it  is  extant.  If  the  credit  has 
been  wisely  granted,  the  note  will  be  paid  when  due 
by  the  customer  accumulating  enough  credit  balance 
in  his  bank  account  and  then  giving  his  check  for  his 


256  LECTURES  ON  COMMERCE 

note.  That  transaction  will  reduce  the  bank's  assets 
and  deposits  by  $100,000;  but  it  will  not  increase  nor 
diminish  the  "money  in  the  bank."  In  only  a  small 
portion  of  the  transactions  thus  accomplished  by  credit 
will  actual  cash  be  demanded,  and  against  this  the 
banker  must  keep  a  certain  percentage  of  his  deposits 
in  cash  reserves.  If  the  credit  be  granted  to  a  worth- 
less customer  who  cannot  retire  it  when  due,  then 
the  bank  loses  the  amount,  because  its  resources  are 
reduced  by  $100,000  while  its  liabilities  remain  the 
same.  Right  there  in  the  difference  between  redeem- 
able and  irredeemable  credit  lies  all  the  difference 
between  good  banking  and  bad  banking,  good  cur- 
rency and  bad  currency,  good  investment  securities  and 
bad  investment  securities. 

Thus  the  increase  of  bank  deposits  was  due  more  to 
the  extension  of  credit  than  to  an  increase  of  actual 
money  in  the  banks,  or  of  funds  looking  for  invest- 
ment. In  like  manner,  when  deposits  decrease  it  is 
a  contraction  of  credit  which  takes  place  rather  than 
a  withdrawal  of  money. 

In  October,  1893,  for  example,  there  was  more 
money  in  the  national  banks  by  $28,000,000  than  there 
was  in  1892,  yet  the  deposits  were  $500,000,000  less 
on  account  of  the  contraction  of  credit  due  to  the 
panic — the  loans  and  other  credit  assets  being  cor- 
respondingly reduced. 

In  any  financial  discussion  we  shall  soon  go  astray 
if  we  lose  sight  of  the  place  and  potency  of  credit. 
It  is  estimated  that  90  per  cent,  of  all  business  trans- 
actions are  done  on  credit,  and  the  currency  used  in 
the  majority  of  cases   composing  the   other    10  per 


INVESTMENTS  257 

cent,  is  only  credit  in  another  form.  In  credit  modern 
finance  lives,  moves,  and  has  its  being.  It  is  not  merely 
the  means  by  which  you  buy  and  buj  and  pay  bye  and 
bye.  It  is  difficult  to  define,  but  we  may  say  it  is  the 
medium  through  which  the  representatives  of  property 
or  value  may  be  exchanged.  The  bank  customer's  note 
is  in  one  sense  only  a  slip  of  paper,  but  it  represents  all 
the  property  owned  by  the  makers.  In  the  same  way 
bonds  represent  the  property  they  are  based  upon; 
certificates  of  stock  represent  the  capital  of  the  com- 
pany which  issues  them,  and  bank  deposits  stand  for 
actual  cash.  Credit  rests  on  confidence,  which  is 
simply  a  reflection  of  the  existing  conditions.  When 
confidence  prevails,  credit  expands  easily — that  is,  the 
representatives  of  property  and  cash  are  readily  inter- 
changed. ^^'hen  confidence  is  shaken,  credit  contracts 
in  proportion  to  the  gravity  of  the  cause,  and  inter- 
change becomes  correspondingly  difficult.  If  confi- 
dence be  destroyed,  there  is  a  panic,  when  it  is  almost 
impossible  for  the  bank  customer  to  negotiate  his 
note,  the  railroad  to  sell  its  bonds,  or  the  industrial 
company  to  float  its  stock.  And  all  this  happens  while 
the  money  in  circulation  is  little,  if  any,  reduced. 

The  past  five  years  have  witnessed  a  remarkable 
expansion  of  credit  in  this  country.  The  bank 
deposits  increased  about  $3,500,000,000,  and  new 
stocks  and  bonds  issued  during  the  period  probably 
reached  a  total  of  $10,000,000,000,  while  the  total 
money  in  the  country,  paper  and  metallic,  increased 
only  about  $500,000,000.  In  other  words,  for  every 
new  dollar  in  money  added  to  the  general  stock,  bank 
deposits  increased  $7  and  securities  $20.     It  is  not 


258  LECTURES  ON  COMMERCE 

necessary,  therefore,  that  money  be  available  to  absorb 
a  new  issue  of  securities.  If  there  is  room  for  them 
in  this  sea  of  credit,  they  may  be  launched  and  floated. 

When  a  new  issue  of  investment  securities  is  made, 
it  is  generally  set  afloat  as  collateral  to  an  expansion 
of  credit  by  the  banks  which  extend  to  the  broker 
or  bond  dealer  credit  with  M^hich  to  carry  the  securi- 
ties until  a  market  is  found  for  them  among  investors. 
The  rapidity  with  which  investors  will  absorb  them, 
and  the  price  paid  for  them,  depend  upon  their  desir- 
ability and  the  condition  of  the  money  market — or, 
more  correctly,  of  the  credit  market. 

If  confidence  abounds,  people  readily  invest  in  the 
representatives  of  property — stocks  and  bonds — and 
this  creates  a  strong  demand  and  a  high  price.  On 
the  other  hand,  if  confidence  be  shaken,  people  prefer 
cash  or  its  representative — bank  balances — of  certain 
value  to  securities  of  uncertain  value,  and  they  are 
slow  to  convert  the  former  into  the  latter;  and  thus 
the  demand  is  less  than  the  supply,  and  the  price 
obtained  is  consequently  lessened.  When  conditions 
are  panicky,  new  issues  of  securities  cannot  be  sold 
at  all,  and  the  holders  of  old  issues  become  so  anxious 
to  convert  them  into  bank  balances  of  stable  value 
that  prices  fall  far  below  intrinsic  value,  and  then  it  is 
"bargain  day"  in  the  credit  world.  Many  rich  men 
hold  their  reserves  for  such  occasions,  which  constantly 
recur,  and  they  grow  richer  by  so  doing. 

The  funds  available  for  investment,  which  gradu- 
ally absorb  securities,  come  chiefly  from  the  following 
sources,  the  first  two  of  which  have  already  been  sug- 
gested : 


INVESTMENTS  259 

1.  Savings  banks  deposits — representing,  not  an 
expansion  of  commercial  credit,  but  the  savings  of 
the  common  people. 

2.  That  portion  of  the  deposits  of  commercial  banks 
w^hich  represents  the  accumulation  of  the  profits  of 
business  and  which  may  be  w^ithdrawn  from  business. 

3.  The  funds  of  life-  and  fire-insurance  companies. 

4.  The  funds  of  educational,  charitable,  and  benevo- 
lent institutions. 

5.  The  funds  of  estates  in  cases  w^here  the  executors 
decide  to  exchange  the  assets  at  risk  of  general  business 
for  permanent  investments,  which  call  for  no  business 
management  on  the  part  of  the  owner. 

6.  The  funds  of  retired  business  men  who  follow 
the  same  course  for  similar  reasons. 

7.  The  investment  accounts  of  commercial  banks 
maintained  for  the  purpose  of  having  some  assets 
which  can  be  converted  into  cash  immediately  in  case 
of  need. 

8.  That  portion  of  the  increment  derived  from 
former  investments  which  the  holders  do  not  spend. 

In  such  good  times  as  we  have  had  during  the  past 
five  years  the  combined  demand  from  all  these  sources 
has  been  enormous ;  hence  both  the  rise  in  the  price  of 
securities  and  the  rush  to  create  and  float  new  issues 
which  we  have  witnessed  during  that  period. 

I  have  not  been  able  to  find  statistics  which  present 
a  complete  account  of  the  increase  in  the  supply  of 
investment  securities  in  the  United  States  during  the 
period  I  have  named.  Some  idea,  however,  may  be 
obtained  from  the  amount  of  bonds  and  stocks  listed 
on  the  New  York  Stock  Exchange,  although  these  are 


26o  LECTURES  ON  COMMERCE 

but  a  small  portion  of  the  whole.  For  the  five  years 
ending  1901  there  were  listed  $949016,639  bonds  and 
$1,443,850,208  stocks,  exclusive  of  those  which  merely 
replaced  old  securities.  In  addition  to  these,  every 
village,  town,  city,  county,  and  state  in  the  country 
has  its  own  local  securities.  New  issues  are  also  con- 
stantly being  created  by  new  inventions,  such  as  the 
telephone,  the  bicycle,  etc.,  so  that  my  former  estimate 
of  a  total  of  $10,000,000,000  of  new  securities  issued 
during  these  five  years  is  probably  not  far  astray. 

Yet  no  question  is  more  frequently  asked  than  this : 
Where  can  I  find  a  safe  investment  which  will  yield 
a  fair  rate  of  interest?  And  perhaps  no  question  is 
more  difficult  to  answer. 

A  man  of  little  experience  and  superficial  knowl- 
edge may  answer  readily  enough,  but  the  answer  will 
come  slowly  from  a  man  of  conservative  judgment. 
The  desirability  of  any  investment  consists  of  three 
attributes:  (i)  safety,  (2)  profit,  (3)  permanency. 
All  three,  however,  are  relative  terms.  In  investments 
there  is  no  Such  thing  as  absolute  safety,  assured  profit, 
or  unchangeable  conditions.  United  States  bonds  are 
today  the  highest-class  investments  in  the  world;  yet 
men  are  still  living  who  saw  them  go  to  a  discount  of 
78  cents  on  the  dollar.  Within  the  last  decade  their 
profitableness  has  been  reduced  by  half,  and  unless 
we  have  another  war  the  indications  are  that  they  will 
all  be  paid  off  within  our  own  day.  All  we  can  do, 
therefore,  is  to  consider  the  relative  safety,  profitable- 
ness, and  permanency  of  the  different  classes  of  invest- 
ment. There  are  investments  which  are  more  safe 
than  profitable;    others  which  are  profitable,  but  not 


INVESTMENTS  261 

safe;   and  many  which  are  neither  safe  nor  profitable, 
but  are  certainly  permanent. 

We  shall  now  consider  the  dififerent  kinds  of  invest- 
ments offered  in  the  United  States,  grouped  as  far  as 
possible  under  four  divisions : 

I.       PUBLIC  SECURITIES. 

At  the  head  of  this  class  stand  government  bonds, 
of  which  there  was  at  one  time  outstanding  over 
$2,500,000,000,  but  of  which  there  are  now  only  about 
$1,000,000,000.  These  are  held  chiefly  by  national 
banks  as  security  for  their  circulation,  or  for  govern- 
ment deposits,  and  by  trustees  for  funds  in  cases  where 
safety  is  a  more  important  consideration  than  profit. 
They  are  as  safe  as  anything  on  earth  and  always 
marketable,  but  they  scarcely  call  for  our  consideration, 
because  they  no  longer  offer  any  attraction  to  ordinary 
investors.  One  of  the  striking  marks  of  our  national 
prosperity  is  the  fact  that  American  investors  have 
recently  been  offered  and  have  readily  accepted  par- 
ticipation in  loans  to  foreign  countries.  Russian 
government  bonds  issued  in  connection  with  their  great 
railway  were  taken  at  a  price  yielding  4  1-8  to  the 
investor;  the  German  loan  of  1901,  3  3-8;  the 
English  short-time  loan  of  1900,  3.4;  and  the  English 
irredeemable  consols  issued  last  year,  about  2.6  per 
cent.  Our  own  government's  now  yield  less  than  2 
per  cent,  to  the  purchaser. 

Next  in  order  come  state  bonds.  Their  history  is 
not  one  of  the  things  we  are  proud  of.  A  total  of  over 
$300,000,000  (principal  and  interest)  of  them  is  now 
delinquent  by  reason  of  repudiation  on  the  part  of 


262  LECTURES  ON  COMMERCE 

their  makers.  A  large  part  of  this  deHnquency  is 
made  up  of  what  is  known  as  "carpet-bag"  bonds 
issued  by  southern  states  during  the  period  of  recon- 
struction and  later  repudiated  on  the  ground  that  the 
governments  creating  them  did  not  properly  represent 
the  people.  But  that  is  not  true  of  all.  Virginia,  for 
example,  has  old  bonds  outstanding  which  were  created 
before  the  war,  and  which  you  can  buy  for  a  few  cents 
on  the  dollar.  This  is  possible  because  the  eleventh 
amendment  to  the  constitution  took  away  the  right 
of  private  parties  to  sue  states  for  payment  of  their 
debts.  It  is  probable  that  the  days  of  repudiation  are 
past,  but  history  sometimes  repeats  itself,  and  it  is 
well  for  the  purchaser  of  state  obligations  to  remember 
that  their  payment  depends  entirely  upon  public  moral- 
ity. If  he  confines  himself,  however,  to  the  bonds  of 
states  whose  good  financial  reputation  is  necessary  to 
the  business  interests  of  their  citizens,  the  risk  of  loss 
which  is  inherent  in  all  investments  will  be  reduced 
to  a  minimum. 

What  has  just  been  said  regarding  state  obligations 
applies  with  equal  force  to  the  obligations  of  municipal- 
ities. There  has  been  much  repudiation  also  on  their 
part,  but  most  of  it  has  been  of  bonds  for  which  the 
people  of  the  municipalities  never  received  any  con- 
sideration, the  bonds  having  been  issued  during  the 
speculative  period  succeeding  the  war  in  support  of 
railroad  schemes.  Unlike  states,  municipalities  can 
be  forced  to  pay  through  the  courts,  and  so  numerous 
have  such  cases  been  that  almost  every  point  concern- 
ing the  legality  of  municipal  obligations  has  been 
finally  decided  by  the  courts.     The  opinion  of  a  com- 


INVESTMENTS  263 

petent  lawyer  as  to  their  validity  is  now  enough  to 
satisfy  investors,  and  such  an  opinion  is  always  offered 
by  bond  dealers  when  offering  the  bonds.  Beyond 
that  it  is  only  necessary  to  ascertain  the  population, 
growth,  and  general  prosperity  of  the  municipality, 
and  the  relation  these  bear  to  its  total  indebtedness, 
in  order  to  decide  upon  the  desirability  of  its  obliga- 
tions as  an  investment.  In  many  states  the  legal  limit 
of  such  indebtedness  is  only  5  per  cent,  of  the  assessed 
value  of  the  property  within  the  municipality,  and  this 
is  perhaps  only  i  per  cent,  of  the  real  value.  With 
this  safeguard,  with  our  population  increasing  at  the 
rate  of  4.000  per  day,  and  witli  the  prevailing  pros- 
perity of  our  country,  municipal  obligations  are  now 
very  popular  investments.  They  yield,  according  to 
their  grade,  from  3.5  to  5  per  cent,  to  the  investor, 
and  as  a  class  they  are  one  of  the  best  investments  in 
the  market. 

II.       REAL-ESTATE   SECURITIES. 

The  purchase  of  real  estate  itself  may  be  considered 
as  an  investment  if  it  is  already  improved  and  yields 
an  income,  or  if  the  purchaser  improves  it  immediately 
after  its  purchase.  To  buy  unimproved  real  estate 
simply  with  the  hope  that  it  will  increase  in  value  in 
the  future  is  a  speculation,  not  an  investment.  Among 
men  who  have  been  successful  in  a  small  way  the 
purchase  of  unimproved  real  estate  is  at  times  quite 
popular.  The  idea  seems  to  be  inherited  that  to  own 
a  piece  of  property  is  a  mark  of  respectability  and 
substance.  The  thought  that  it  cannot  run  away  or 
disappear  seems  to  make  it  safe,  and  there  is  always 
the   hope   that    it   will    increase    in   value.     Nothing, 


264  LECTURES  ON  COMMERCE 

however,  could  be  more  delusive.  In  ninety-nine  cases 
out  of  a  hundred  it  would  pay  better  to  put  the  money 
in  a  savings  bank  at  3  per  cent,  interest.  Even 
improved  property  is  usually  unsatisfactory  as  an 
investment.  When  taxes,  depreciation  by  use  and  by 
change  of  style,  repairs,  insurance,  periods  of  vacancy, 
and  failure  to  collect  rents  are  taken  into  account,  the 
owners  of  real  estate  are  generally  disappointed  in  the 
net  result.  There  are  many  notable  exceptions,  of 
course,  but  to  own  much  real  estate  and  get  little  out 
of  it  is  so  common  that  the  term  "real-estate  poor"  has 
come  to  be  quite  well  understood  among  business  men. 
The  safest  way  to  invest  money  in  real  estate  is  to  buy 
it  and  lease  it  to  others  to  build  upon.  In  good  locali- 
ties the  ground  rent  is  assured  by  this  means,  and  this 
makes  one  of  the  safest  investments  known.  There 
is  not  enough  of  such  business,  however,  to  make  it 
generally  available. 

Another  way  to  invest  money  in  real  estate  is  to 
advance  it  on  mortgages,  with  a  margin  which  should 
not  be  less  than  50  per  cent.  Even  then  you  are  not 
sure  that  you  will  not  have  to  foreclose  your  mortgage 
and  take  the  property.  A  fall  of  50  per  cent,  in  the 
estimated  value  of  real  estate  during  the  currency  of 
a  mortgage  even  in  growing  and  prosperous  com- 
munities is  by  no  means  uncommon.  The  value  of 
real  estate  is  never  more  than  an  estimate — an  opinion 
— in  which  it  is  always  difficult  to  find  two  authorities 
who  agree.  There  is  nothing  wilder  or  more  extrava- 
gant than  the  ideas  of  otherwise  sensible  men  on  the 
value  of  real  estate  during  a  period  of  inflation.  I 
remember  a  case  in  Minneapolis  which  will  serve  as 


INVESTMENTS  265 

an  illustration.  A  man  after  successful  litigation 
became  the  owner  of  a  tract  of  land  near  that  prosper- 
ous city,  valued  in  popular  opinion  at  a  million  dollars. 
He  became  involved  in  debt  to  the  extent  of  $250,000 
and  mortgaged  all  his  real  estate  for  the  benefit  of  his 
creditors.  The  mortgage  was  foreclosed  for  the  vari- 
ous creditors  by  the  leading  lawyer  of  the  city — one  of 
the  ablest  all-round  business  men  I  have  ever  known — 
who  thus  became  thoroughly  familiar  with  the  prop- 
erty. The  bank  with  which  I  was  connected  was  one 
of  the  creditors,  and  I  remember  his  telling  me  that 
the  claim  was  quite  good  because  the  debtor  would 
be  certain  to  redeem  the  property  from  the  foreclosure. 
It  was  not  redeemed,  however,  and  it  fell  to  my  lot 
to  arrange  a  division  of  the  property  among  the 
creditors.  For  that  purpose  I  had  another  valuation 
made  of  the  various  lots,  which  amounted  in  all  to 
about  $70,000.  On  that  basis  the  million-dollar  prop- 
erty was  divided,  the  best  cash  offer  we  could  get 
being  about  two-thirds  of  that  amount.  In  other 
words,  the  value  of  a  tract  of  land  contiguous  to  a 
thriving  city  of  160,000  inhabitants  shrunk  in  popular 
estimation  in  a  few  years  from  $1,000,000  to  less  than 
$50,000. 

Anyone  wishing  to  invest  his  money  in  a  real- 
estate  mortgage  should  make  sure  that  he  is  getting 
a  first  mortgage.  There  is  nothing  on  the  face  of  a 
mortgage  or  trust  deed  in  Illinois  and  some  other 
states  to  show  whether  a  prior  lien  exists,  and  the 
palming  off  of  a  second  or  third  mortgage  as  a  first 
is  not  an  unknown  trick.  He  should  also  be  satisfied 
that  the  title  is  clear  in  the  name  of  the  mortgagor. 


266  LECTURES  ON  COMMERCE 

This  is  usually  evidenced  by  a  title-guarantee  policy 
which  is  sufficient  in  most  cases,  though  by  no  means 
infallible.  Then  he  should  insist  on  seeing  the  prop- 
erty with  his  own  eyes.  No  matter  how  reliable  the 
mortgage  dealer  may  be,  a  purchaser  may,  by  visiting 
the  property,  discover  something  which  may  save  him 
from  an  unsafe,  or  at  least  a  slow  and  unsatisfactory, 
investment.  It  is  not  impossible  that  he  may  discover 
that  the  building  shown  to  him  by  the  mortgage 
broker  as  on  the  property  is  as  yet  far  from  completed, 
and  that  only  part  of  the  money  represented  by  the 
mortgage  has  been  paid  to  the  mortgagor,  the  balance 
being  represented  by  a  credit  on  the  books  of  the 
broker  which  is  to  be  exhausted  as  the  building  goes 
on.  In  this  case  the  investor  must  trust  to  the  broker 
to  see  that  the  building  is  completed  free  of  mechanic's 
liens  and  fit  for  occupancy.  Whether  it  is  safe  to  trust 
the  broker  depends  upon  his  financial  and  moral  stand- 
ing— which  opens  up  a  new  field  of  investigation  for 
the  investor.  He  should  also  inquire  into  the  financial 
standing  of  the  mortgagor.  If  that  be  unsatisfactory, 
the  payment  of  interest  is  likely  to  be  irregular,  and 
foreclosure  may  become  necessary  on  account  of  the 
mortgagor's  difficulties,  although  the  property  itself 
may  be  quite  good  for  the  amount  involved.  Fore- 
closure is  a  slow,  tedious,  and  expensive  way  of  get- 
ting your  money  back,  even  if  it  does  get  it  back. 

One  of  the  worst  forms  of  investment  in  real  estate, 
in  my  opinion,  is  building  and  loan  associations.  They 
are  gotten  up  in  most  attractive  forms  to  catch  the 
monthly  savings  of  thrifty  people  with  moderate 
incomes.     I  know  there  are  some  of  these  in  the  older 


INVESTMENTS  267 

parts  of  the  country  that  are  apparently  successful, 
but  my  experience  of  them  in  the  West  leads  me  to 
consider  them  as,  on  the  whole,  almost  the  easiest 
concerns  to  get  your  money  into  and  the  hardest  to 
get  it  out  of  that  I  know.  Their  plans  seem  so  simple 
that  anyone  can  understand  them ;  nevertheless,  one 
of  my  friends  in  Chicago,  who  is  a  thorough  account- 
ant, lost  the  savings  of  years  in  a  building  and  loan 
association  of  which  he  himself  was  the  annual  auditor. 
On  the  other  hand,  farm  mortgages  are  one  of  the 
best  real-estate  investments.  Swindlers  have  not  been 
unknown  along  this  line,  but  I  believe  the  results  to 
investors  have  been  as  satisfactory  as  in  any  line  of 
investments.  As  in  all  others,  prudence  and  common- 
sense  must  be  exercised;  but  there  are  many  corpora- 
tions and  firms  of  high  standing  engaged  in  the  farm- 
mortgage  business,  and  by  dealing  only  with  such,  and 
avoiding  certain  states  where  the  laws  seem  to  have 
been  made  for  the  debtors,  a  safe  and  fairly  remunera- 
tive investment  in  farm  mortgages  is  easily  obtained. 
On  the  whole,  investors  should  remember  that  to 
invest  safely  and  satisfactorily  in  real-estate  securities 
requires  more  knowledge  of  business,  more  experience, 
and  better  judgment  than  to  invest  in  almost  anything 
else. 

III.       CORPORATION    BONDS. 

Under  this  head  come,  first,  railroad  bonds,  which 
have  absorbed  more  capital  than  any  other  investment 
in  this  country.  In  the  year  1899  there  were  187,781 
miles  of  railroad  in  operation,  the  bonds  on  which 
amounted  to  $5,699,858,000,  or  $30,000  per  mile. 
The  interest  paid  on  the  bonds  w^as  $245,250,000,  or 


268  LECTURES  ON  COMMERCE 

4.12  per  cent.  This  great  class  of  investment  securi- 
ties is  composed  of  various  kinds.  We  have  not  only 
first,  second,  and  third  mortgage  bonds,  but  consoli- 
dated mortgage  bonds,  income  bonds,  convertible 
bonds,  terminal  bonds,  collateral  trust  bonds,  equip- 
ment bonds,  etc. 

Among  such  a  mass  and  variety  as  I  have  mentioned 
there  are  many  of  inferior  quality,  and  some  of  even 
worthless  character.  The  chief  guide  for  the  investor 
is  in  the  earning  capacity  of  the  road,  and  reliable 
information  on  that  point  is  easy  to  obtain.  If  the 
road's  net  earnings  are  at  least  twice  its  bonded  debt 
charges,  and  if  the  road  is  well  kept  up  so  that  such 
earnings  are  likely  to  continue,  the  bond  may  be 
considered  satisfactory  in  that  respect.  There  is  no 
difficulty  in  procuring  good  railroad  bonds  as  an  invest- 
ment, if  the  investor  confines  himself  to  the  issues  of 
well-established  roads,  and  is  content  with  a  return  of 
4  per  cent,  or  a  little  less.  It  is  when  the  bonds  of 
new  railway  projects  are  offered  that  caution  is  neces- 
sary. It  is  a  well-recognized  principle  in  railroad 
building  that  the  road  should  be  made  not  only  to  pay 
for  its  cost,  but  to  yield  a  profit  to  the  projectors 
besides.  In  other  words,  there  is  usually  some  ''water" 
in  the  first  issue  of  bonds — to  say  nothing  of  the  stock. 
The  squeezing  out  of  the  water  in  times  past  has 
frequently  been  an  expensive  operation  for  the  bond 
holders.  The  appointment  of  a  receiver,  the  discredit- 
ing of  the  securities,  the  purchase  of  them  by  "insiders" 
at  a  heavy  discount,  the  "reorganization"  of  the  road, 
or  the  sale  of  it  to  a  large  system,  and  the  final  happy 
outcome  for  said  "insiders,"  is  a  process  with  which 


INVESTMENTS  269 

the  student  of  railroad  history  is  famiHar.  Nor  have 
cases  of  actual  fraud  in  this  line  of  operation  been 
wanting.  Sometimes  they  break  ground  for  a  railroad 
with  great  ceremony. .  Then  they  proceed  to  break  the 
shareholders  without  any  ceremony.  The  Arkansas 
Central  Railway  Co.  built  only  forty-eight  miles  of  its 
projected  road,  but  its  promoters  succeeded  in  floating 
$5,000,000  in  bonds  of  one  kind  or  another  on  it.  The 
road  was  so  poorly  built  (what  there  was  of  it)  that  it 
was  almost  worthless.  When  it  was  sold  by  the  re- 
ceiver at  public  auction,  it  brought  the  sum  of  $40,000, 
and  even  that  was  paid  to  the  receiver  in  his  own  re- 
ceiver's certificates,  which  had  been  bought  at  a  dis- 
count. Such  cases  sufficiently  illustrate  the  kind  of 
daneers  to  be  avoided  in  this  class  of  securities.  Our 
railroads  at  present,  however,  are  in  better  condition 
than  ever  before.  As  a  rule,  they  are  properties  of 
enormous  value  and  productive  power,  and  no  better 
securities,  as  a  whole,  can  be  had  than  properly  selected 
railroad  bonds. 

Another  large  and  rapidly  growing  class  of  bonds 
is  composed  of  the  issues  of  corporations  operating 
public  utilities,  such  as  street  railways,  telephones,  gas 
and  electric-light  plants,  etc.  Those  offered  in  the 
market,  however,  are  frequently  new  and  based  on  prop- 
erties in  course  of  construction.  They  are  disposed  of 
on  "estimated"  earnings  and  well-written  prospectuses. 
In  such  cases  investors  should  never  forget  that,  as  a 
rule,  all  the  risk  of  the  enterprise  is  put  upon  the  bond 
buyers.  If  it  turns  out  a  success,  their  investment  will 
be  good  and  they  will  get  their  5  per  cent,  per  annum. 
All  the  rest  of  the  "estimated"  profits  that  illumine  the 


270  LECTURES  ON  COMMERCE 

pages  of  the  prospectus — be  they  ever  so  large — will 
go  to  the  promoters  of  the  scheme,  who,  as  a  rule,  have 
put  in  no  money  of  their  own. 

If  it  turns  out  a  failure,  the  bondholders  will  be  the 
only  losers.  This  division  of  profit  and  risk  does 
not  seem  quite  equitable,  but  it  is  astonishing  how 
ready  many  people  are  to  accept  it.  The  moral  is 
plain :  Never  invest  your  money  in  the  bonds  of  any 
such  enterprise  until  it  is  completed  and  can  show 
actual  net  earnings  of  not  less  thaixtwice  the  amount 
required  to  pay  the  interest  on  its  bonds. 

Many  of  these  enterprises  are  legitimate  and  profit- 
able, and  offer  good  security  for  their  bonds.  But  it 
is  time  enough  to  buy  the  securities  after  their  safety 
has  been  demonstrated  by  actual  experience.  This  is 
a  good  rule,  indeed,  in  regard  to  any  investment. 

There  is  another  class  of  bonds  somewhat  similar 
to  those  last  mentioned — waterworks  bonds.  The 
provision  of  law,  before  alluded  to,  limiting  the  bor- 
rowing power  of  municipalities  to  5  per  cent,  of  their 
assessed  property  value,  prevents  many  towns  from 
owning  their  own  waterworks.  The  plan  usually 
adopted  is  to  form  a  corporation  to  which  an  exclusive 
franchise  is  granted  to  build  waterworks.  A  contract 
is  then  entered  into  between  the  municipality  and  the 
water  company,  by  which  the  latter  undertakes  to 
supply  the  former  with  a  certain  number  of  hydrants 
for  fire  protection,  etc.,  for  a  certain  sum  per  annum. 
This  annual  payment  is  then  used  to  form  a  sinking 
fund  for  the  retirement  of  the  bonds  issued  to  cover 
the  cost  of  the  waterworks.  The  company  has  also 
the  right  to   sell   water  to   the   inhabitants,   and   the 


INVESTMENTS  271 

enterprise  is  frequently  a  profitable  one,  forming  a 
safe  basis  for  the  issue  of  bonds.  As  usual,  however, 
there  are  numerous  dangers  to  be  avoided,  and  possible 
losses  to  be  feared. 

One  of  these  is  that  the  water  supply  may  not  prove 
sufficient.  Another  is  that  the  construction  of  the 
works  may  be  cheap  and  not  last  as  long  as  the  life  of 
the  bonds.  Still  another  danger  is  that  the  munici- 
pality cannot  be  bound  by  its  contract  longer  than 
the  life  of  the  council  which  made  it.  A  succeeding 
council  may  reduce  the  price  paid  for  the  hydrants. 
The  greatest  danger  of  all  is  that  the  company  may 
get  into  a  fight  with  the  city;  that  the  citizens  may 
claim  that  the  water  is  impure,  and  that  as  a  result 
the  waterworks  may  be  abandoned  and  another  water 
supply  adopted.  Wlien  I  lived  in  Duluth,  I  witnessed 
such  a  fight  brought  about  by  an  epidemic  of  typhoid 
fever.  When  the  fight  began,  the  water  company's 
bonds  were  considered  a  first-class  investment,  and 
its  stock  was  very  valuable.  When  it  ended,  the  bond- 
holders got  seventy  cents  on  the  dollar  and  the  stock- 
holders nothing. 

I  might  go  on  discussing  miscellaneous  bonds,  but 
it  is  not  necessary.  Enough  has  been  said  to  indicate 
the  dangers  to  be  guarded  against,  and  to  show  that 
careful  investigation  before  buying  is  a  necessity;  for 
while  there  are  good,  safe  investments  offered  in  all 
classes  of  bonds,  it  is  easy  to  lose  money. 

IV.       STOCKS. 

The  great  difference  between  bonds  and  stocks  is 
that,  while  the  former  are  a  lien  on  property  of  one 


272  LECTURES  ON  COMMERCE 

kind  or  another,  the  latter  frequently  represent  nothing 
more  tangible  than  earning  capacity,  good-will,  and  the 
hope  of  the  future.  These  are  sometimes  assets  of 
great,  but  always  uncertain,  value.  As  a  rule,  it  is 
the  hope  of  a  rise  in  value  which  leads  investors  to 
purchase  stocks,  and  this  brings  a  speculative  element 
into  the  transaction.  Of  course,  stocks  are  not  all 
equally  speculative.  Bank  stocks,  for  example,  with 
their  sworn,  published  statements,  and  the  safeguards 
of  government  inspection,  are  not  to  be  classed  with 
mining  stocks,  about  which  nothing  published  is  ever 
true,  and  of  which  no  inspection  is  ever  disinterested. 

Another  vital  difference  between  bonds  and  stocks 
is  that  the  former  is  a  promise  to  pay  both  principal 
and  interest,  which  can  be  enforced  by  law,  whereas 
stock  promises  nothing.  In  other  words,  the  holder 
of  a  bond  becomes  a  creditor  of  the  makers  of  the  bond, 
whereas  the  holder  of  stock  becomes  a  part  of  the 
company  issuing  it,  and  to  that  extent  a  debtor  for 
all  the  liabilities  of  the  company.  In  some  cases 
(notably  in  bank  stocks)  the  holder  of  the  stock  is 
liable  for  as  much  again  as  the  face  amount  of  the 
stock. 

Among  stocks  railways  form  the  largest  and  most 
popular  class.  The  total  amount  of  them  is  slightly 
greater  than  that  of  railroad  bonds,  viz.,  $5,742,000,- 
000  in  1899,  while  the  dividends  paid  amounted  to 
$109,000,000,  or  1.90  per  cent.  In  such  a  vast  total 
there  is,  of  course,  great  variety,  grading  all  the  way 
from  first-class  to  worthless.  Most  of  them  are  listed 
on  the  New  York  Stock  Exchange — a  fact  which  has 
both  advantages  and  disadvantages  from  an  investment 


INVESTMENTS  273 

Standpoint.  The  chief  advantage  is  that  they  can  be 
readily  sold,  but  this  is  outweighed  by  the  fact  that 
they  can  be  as  readily  manipulated  for  stock-jobbing 
purposes.  As  a  class,  they  cannot  be  recommended 
to  investors  who  desire  something  that  they  can  "go  to 
sleep  on."  They  require  constant  and  intelligent 
watching,  and  only  those  who  are  capable  of  giving 
that  to  them  should  put  their  money  into  them. 

Another  large  class  of  stocks  which  has  come  into 
special  prominence  in  the  last  few  years  is  that  known 
as  industrials,  which  are  chiefly  the  preferred  and  com- 
mon stocks  of  the  large  corporations  commonly  called 
"trusts."  The  extravagant  way  in  which  most  of 
these  combinations  have  been  capitalized  has  filled 
many  conservative  minds  with  vague  forebodings  of 
coming  disaster — moral,  financial,  and  national — as 
the  final  outcome  of  the  movement.  But  we  should 
not  confound  the  manner  of  doing  a  thing  with  the 
thing  itself.  We  may  admit  that  the  promoter's  profit 
has  been  the  chief  motive  in  most  of  the  combinations, 
that  capitalization  has  been  extravagant,  that  specula- 
tion has  been  overstimulated,  and  that  great  danger 
exists  in  the  fact  that  the  caution  which  should  control 
the  investor  has  already  given  place  to  the  craze  for 
large  and  quick  returns.  But  the  movement  itself 
will  outlive  these  accompaniments,  if  it  is  economically 
sound,  and  if  it  leads  to  the  greater  and  easier  produc- 
tion of  wealth.  In  my  opinion,  the  so-called  trusts 
are  here  to  stay.  The  college  presidents  may  rage 
and  the  politicians  imagine  a  vain  thing,  but  no  law 
can  be  formed  which  will  make  it  a  crime  for  any 
number  of  people  to  combine  their  capital  and  ability 


274  LECTURES  ON  COMMERCE 

in  any  legitimate  business.  Laws  may  be  and  should 
be  enacted  for  the  regulation  of  the  combinations  for 
greater  safeguards  to  the  investing  public,  and  for  the 
protection  of  competing  smaller  concerns  against 
monoply.  Compulsory  publicity  of  the  condition  of 
the  corporations  would  go  a  long  w^ay  in  the  right 
direction;  but  all  talk  of  stopping  the  movement  is 
vain.  It  is  clearly  an  economical  evolution  from  the 
evils  of  excessive  competition,  and  much  can  be  said 
in  its  favor.  Its  tendency  is  toward  economy  of  pro- 
.  j  duction  by  the  saving  of  all  wasteful  and  unnecessary 
V  '  expense;  and  this  is  in  harmony  with  the  spirit  of 
the  age,  which  is  ever  improving  on  old  methods  and 
machinery.  Its  tendency  is  always  toward  a  larger 
ownership  of  the  property  represented  by  the  corpora- 
tion and  a  wider  distribution  of  the  profits.  There  are 
now  thousands  of  owners  where  there  were  but 
hundreds.  Competition  is  now  between  nations  as 
well  as  individuals.  Consolidations  have  had  their 
share  in  placing  this  country  at  least  a  neck  ahead  of 
our  greatest  competitors  in  the  international  race. 
How  they  will  affect,  or  be  affected  by,  hard  times 
remains  to  be  seen.  It  is  probable,  how^ever,  that  a 
few  great  vessels  will  weather  a  storm  better  than  many 
small  craft.  When  great  changes  are  going  on,  it  is 
natural  tohave  some  apprehension  as  to  final  results,  and 
easy  to  prophesy  evil.  When  Rowland  Hill's  penny- 
post  scheme  had  gained  such  support  as  to  have  its 
adoption  proposed  in  Parliament,  Sir  Robert  Peel,  the 
greatest  financial  minister  of  his  day,  was  its  strongest 
opponent,  and  prophesied  nothing  but  loss  and  failure 
as  results.     All  the  great  movements  in  history  were 


INVESTMENTS 


275 


fiercely  opposed  by  some  of  the  ablest  men  of  the  time 
who  were  specialists  in  the  particular  matter  in  ques- 
tion. Looking  back  now,  their  opposition  seems 
absurd.  And  so  when  our  theoretical  economists 
predict  disaster  from  this  movement,  I  say  we  must 
wait  and  see.  None  of  the  calamities  has  happened 
yet. 

A  great  railroad  resembles  a  modern  trust  in  many 
respects.  It  is  generally  controlled  by  one  man,  but 
owned  by  thousands.  It  pays  its  stockholders  better, 
serves  the  public  better,  advances  national  develop- 
ment better,  and  makes  transportation  vastly  cheaper 
than  a  hundred  small  roads  could  do.  In  fact,  the 
industries  now  being  combined  into  large  corporations 
are  only  following  the  example  of  the  railroads.  Of 
course,  there  is  always  the  danger  that  things  will  be 
overdone  and  tendencies  carried  too  far.  But  against 
this  there  is  an  intelligent  public  sentiment  which  will 
have  to  be  reckoned  with.  I  believe  the  so-called 
trusts  will  live;  but  they  will  live  only  by  proving 
that  their  existence  is  a  benefit  to  the  people  and  not 
a  curse.  This,  I  think,  they  will  be  able  and  wise 
enough  to  do. 

I  submit,  therefore,  that  the  field  for  investment 
known  as  "industrials"  should  not  be  passed  by  with 
a  timid  epigram,  but  is  fairly  entitled  to  consideration. 
Here,  even  more  than  elsewhere,  investigation  of  the 
facts,  guided  by  common-sense,  is  a  necessity.  The 
common  stocks  composed  entirely  of  water  and  given 
away  as  a  bonus  to  help  sell  the  preferred  cannot  be 
classed  as  investments,  and  many  of  the  preferred 
stocks  represent  so  extravagant  capitalization  that  they 


2/6  LECTURES  ON  COMMERCE 

also  should  be  avoided.  But  for  investors  capable  of 
intelligent  investigation  before,  and  supervision  after, 
purchasing  their  investments  some  of  the  preferred 
industrials  offer  a  legitimate  and  profitable  opportunity. 
I  have  in  mind  a  large  company  whose  products  are 
used  in  every  household  of  the  land.  It  is  provided 
with  sufficient  working  capital  so  that  it  is  never  a 
borrower,  and  it  has  no  bonds,  except  a  small  amount 
existing  on  some  of  the  plants  before  they  were 
acquired,  which  cannot  be  paid  until  they  mature.  It 
has  earned  dividends  on  its  preferred  and  common 
stock  from  the  beginning,  and  is  piling  up  a  good 
reserve  fund  besides.  It  has  a  staple  business  and  is 
excellently  managed.  I  fail  to  see,  therefore,  why  its 
preferred  stock,  or  the  preferred  stock  of  any  other 
"industrial"  in  like  circumstances,  is  not  a  safe  and 
legitimate  investment  for  a  business  man  capable  of 
keeping  an  intelligent  supervision  of  his  affairs. 

In  addition  to  these  great  classes  there  are  miscel- 
laneous stocks  too  numerous  to  be  here  discussed. 
With  regard  to  them  as  to  all  other  securities,  few 
general  rules  for  insuring  safety  can  be  stated.  My 
object  in  this  discussion  has  been  simply  to  hint  at  the 
dangers  to  be  avoided,  and  to  suggest  the  lines  of 
investigation  to  be  followed  in  buying  the  common 
securities  which  our  market  offers. 

It  may  be  said,  however,  that  the  safest  general 
rule  is  to  be  content  with  a  moderate  rate  of  interest. 
From  3J^  to  5  per  cent,  is  all  that  can  now  be  looked 
for  in  securities  which  will  require  no  watching  on 
the  part  of  the  holder.  One  per  cent,  more  return  on 
an  investment  usually  means  at  least  10  per  cent,  more 


INVESTMENTS  277 

risk  of  losing  the  principal.  The  days  of  large  returns 
on  securities  offered  to  the  general  public  are  over,  and 
all  flaming  advertisements  or  well-written  circulars 
which  promise  high  rates  of  interest  should  be  passed 
by  as  little  better  than  frauds. 

An  investor  should  never  allow  himself  to  be 
hurried  into  buying  anything  on  the  ground  that  if  he 
does  not  buy  at  once  the  opportunity  w^ill  be  gone.  He 
should  take  time  to  see  the  property  or  to  read  the 
document.  This  may  save  him  much  time,  worry, 
and  loss.  It  is  wise  not  to  put  too  many  eggs  into 
one  basket,  and  not  to  buy  when  everyone  else  seems 
to  be  buying  the  same  thing.  Above  all,  he  should 
never  expect  something  for  nothing.  Anything  that 
can  be  got  for  nothing  in  the  business  world  is  pretty 
sure  to  be  worth  nothing,  but  to  cost  something  in  the 
end. 

The  rate  of  interest  on  investments  has  been  steadily 
declining  for  many  years,  but  is  now,  in  my  opinion, 
as  low  as  it  is  likely  to  go  for  many  years  to  come. 
We  are  only  beginning  to  realize  the  tremendous 
resources  of  our  country,  and  until  they  have  been  fully 
developed,  capital  will  continue  to  bring  fair  returns. 

You  young  men  are  going  to  enter  business  life  at 
a  time  when  the  future  is  big  with  opportunity.  Dur- 
ing the  next  twenty  years  America  should  take  its 
place  as  the  greatest  and  richest  commercial  nation 
the  world  has  ever  seen.  I  wish  for  all  of  you  a 
large  share  in  the  work  of  bringing  that  about,  and 
in  the  fruits  of  our  national   prosperity. 


/ 


FOREIGN  EXCHANGE. 

H.    K.    BROOKS,    MANAGER   OF   THE    FINANCIAL   DEPART- 
MENT,   AMERICAN    EXPRESS    CO. 

Foreign-exchange  transactions  are  generally  regard- 
ed as  being  quite  complicated,  and  although  there  are 
some  operations  requiring  experience  and  patient  study, 
the  system  as  a  whole  cannot  be  said  to  be  any  more 
intricate  than  many  of  the  problems  daily  arising  in 
mercantile  business. 

The  reason  of  there  being  so  few,  comparatively, 
who  have  a  thorough  knowledge  of  the  subject  may 
perhaps  be  attributed  to  the  fact  until  recent  years  the 
business  was  confined  to  the  leading  banks  at  large 
trade  centers.  Other  banks  having  call  for  foreign 
drafts,  letters  of  credit,  or  other  foreign  paper  would 
obtain  the  same  from  the  large  banks  mentioned  or 
refer  customers  to  them  direct. 

The  enormous  growth  ef  our  import  business,  the 
large  increase  in  foreign  travel,  and  the  extension  of 
our  trade  to  nearly  every  country  in  the  world  so 
greatly  increased  the  volume  of  foreign  exchange 
transactions  that  it  naturally  invited  competition,  and 
today  almost  every  bank  and  financial  institution  at 
a  place  of  any  importance  is  equipped  with  the  facilities 
necessary  to  meet  the  demand  for  this  class  of  business 
of  its  patrons. 

Merchants  who  formerly  imported  goods  from 
foreign  countries  through  brokers  at  seaport  cities  now 
have  foreign  departments  for  the  transaction  of  the 

278 


FOREIGN  EXCHANGE 


279 


business  direct.  Our  manufacturers,  who  formerly 
did  not  think  of  looking  beyond  the  limits  of  this 
country  for  a  market  for  their  goods,  have  learned, 
through  a  better  knowledge  of  the  conditions,  that  they 
can  successfully  compete  with  foreign  manufacturers. 
Our  war  with  Spain  is  said  to  have  opened  the  eyes  of 
our  manufacturers  to  the  fact  that  there  was  a 
vast  population  outside  of  the  United  States  who  were 
dependent  for  many  commodities  upon  countries  which 
were  in  no  better  position,  geographically  or  otherwise, 
to  supply  their  needs;  and  if  we  judge  from  the  large 
increase  in  our  exports  since  the  war,  there  was,  no 
doubt,  some  foundation  for  the  statement. 

In  an  article  recently  published  in  one  of  the  leading 
financial  papers — the  New  York  Financier — it  was 
stated  that  the  demand  among  bankers  and  large  mer- 
cantile houses  for  young  men  having  a  general  knowl- 
edge of  foreign  exchange  and  foreign  shipping  very 
greatly  exceeds  the  supply ;  that  students  fitting  them- 
selves for  mercantile  life  should  devote  as  much  study 
as  possible  to  this  branch,  since  it  would  be  a  very 
valuable  acquisition  to  their  fitness  for  the  present 
commercial  business,  and  at  the  same  time  insure  a 
higher  appreciation  and  greater  salary  for  their  ser- 
vices than  usually  paid  for  other  branches  of  either 
mercantile  or  banking  business. 

Foreign  exchange  is  a  system  by  which  commercial 
nations  discharge  their  debts  to  each  other.  This  in- 
debtedness may  represent  the  value  of  commodities  ex- 
ported to  or  imported  from  other  countries,  money 
borrowed,  loaned,  or  invested  abroad,  and  the  interest 
or  profits  on  such  funds ;  the  cost  for  transportation  of 


28o  LECTURES  ON  COMMERCE 

goods  and  the  commissions  for  service;  the  expense 
incurred  in  traveling  in  foreign  countries ;  in  fact,  any 
transactions  which  involve  the  remitting  of  money,  or 
anything  representing  money,  from  one  country  to 
another.  These  debts  have  to  be  paid,  either  with  cash 
or  something  equally  satisfactory  to  the  creditors. 
The  cost  of  transmitting  gold  or  currency,  and  the  risk 
attending  the  same,  while  sometimes  resorted  to,  are 
generally  considered  too  great,  and  it  is  to  avoid  this 
risk  and  expense  that  the  system  of  exchanging  debts 
through  the  medium  of  commercial  paper  is  adopted. 

One  can  hardly  appreciate  the  magnitude  of  the 
business  between  the  United  States  and  foreign  coun- 
tries which,  directly  or  indirectly,  is  transacted  through 
the  medium  of  the  system  we  term  "foreign  exchange," 
without  resorting  to  actual  data  in  the  shape  of  figures, 
and  we  find  these  figures  so  large  as  to  be  almost  in- 
comprehensible. 

For  the  twelve  months  ending  December  31,  1901, 
the  value  of  the  goods  or  commodities  exported  from 
this  country  to  other  countries  amounted  to  $1,465,- 
500,000,  and  during  the  same  period  the  United  States 
imported  from  other  countries  goods  to  the  value  of 
$880,400,000,  making  a  total  of  exports  and  imports 
during  the  year  1901  of  $2,345,900,000 — a  sum  which, 
if  in  $1  bills  fastened  together  at  their  ends,  would 
make  a  band  nearly  260,000  miles  long. 

The  value  of  the  goods  we  exported  exceeded  the 
value  of  those  imported  by  $585,100,000,  which 
amount  of  credit  in  our  favor  would,  had  there  been 
no  other  transactions  to  offset  it,  have  to  be  remitted 
to  us  from  the  various  foreign  countries.     But  against 


FOREIGN  EXCHANGE  281 

this  credit  in  our  favor  foreign  countries  charged  up 
to  us  the  amount  paid  out  on  letters  of  credit  used  by 
our  people  to  meet  expenses  in  travel  abroad — bal- 
ance due  on  loans  made  by  our  capitalists  to  float  some 
of  the  larger  enterprises,  such  as  railroad  consolida- 
tions, the  United  States  Steel  Corporation,  etc.;  so 
that,  notwithstanding  there  was  a  large  balance  due  us 
in  the  difference  between  the  value  of  the  goods  we 
sold  to,  and  those  we  purchased  from,  foreign  coun- 
tries, it  was  entirely  offset,  and  more  too,  by  other 
transactions.  In  fact,  during  the  year  1901  we  ex- 
ported $3,348,000  more  gold  than  we  imported.  But 
whether  the  balance  be  in  our  favor  or  against  us,  the 
total  amount  of  the  business  transacted  is  practically 
all  handled  through  the  medium  of  the  system  we  call 
''foreign  exchange,"  and  the  importance  of  a  thorough 
knowledge  of  the  system  in  its  various  details  is  becom- 
inp-  s:reater  each  vear. 

A  knowledge  of  the  money  of  account,  or  monetary 
systems,  of  the  various  foreign  countries  is  one  of  the 
first  things  necessary  to  a  clear  understanding  of 
foreign-exchange  transactions. 

Paper  money,  such  as  government  and  bank  notes 
and  certificates,  are,  as  a  rule,  intended  solely  for  circu- 
lation within  the  country  in  which  issued,  and  are  not 
legal  tender  outside  of  the  country  in  which  they  ema- 
nate. Of  course,  paper  money  is  often  accepted  in  small 
amounts  for  its  full  face  value  in  other  countries,  but 
it  is  always  optional  with  the  creditor  to  accept  it. 

Silver  and  minor  coins  are  also  intended  for  domes- 
tic use,  and  when  accepted  in  other  countries  it  is  at 
their  actual  value  rather  than  at  their  face  value.    For 


282  LECTURES  ON  COMMERCE 

illustration  :  The  purchasing  power  of  the  silver  dollar 
of  the  United  States  within  this  country  is  as  great  for 
small  sums  as  that  of  the  gold  dollar,  but  in  other  coun- 
tries it  would  be  accepted  only  for  its  bullion  value. 
The  Mexican  dollar,  which  passes  for  its  face  value  in 
Mexico,  is  worth  less  than  fifty  cents  in  this  country. 

Gold,  by  virtue  of  commercial  usage  and  the  laws  of 
the  various  countries  of  the  world,  may  be  said  to  be 
the  only  international  money,  and  its  purchasing  power 
is  practically  the  same  throughout  the  civilized  world. 
But  bear  in  mind  that  the  A^alue  of  gold  coins  is  not 
always  as  expressed  on  their  face.  In  large  inter- 
national transactions  the  weight  of  the  mass  is  regard- 
ed, and  not  the  number  of  pieces,  and  their  value 
depends  upon  the  weight  and  fineness.  By  "fineness" 
is  meant  pure  metal.  Nearly  all  coins  contain  alloy,  or 
inferior  metal  which  is  added  to  increase  their  dura- 
bility. 

The  value  or  price  of  the  gold  money  of  account  of 
commercial  countries  is  determined  by  the  weight  and 
fineness  of  the  metal  contained  therein,  which  weight 
and  fineness  are  established  by  the  mint  laws  of  the 
country  issuing  the  money.  It  is  therefore  essential 
that  the  standard  of  weight  by  which  the  various  mon- 
eys of  account  are  established  shall  be  unvarying,  and 
have  the  highest  legal  sanction;  otherwise  there  could 
be  no  stability  of  values  and  no  such  thing  as  accurate 
deductions  of  pars  of  exchange.  Gold  is  the  only  com- 
modity in  the  world  the  value  of  which  is  established 
by  law. 

The  price  of  gold  cannot  be  affected  either  by  an 
abundance  or  scarcity  of  the  supply.     No  matter  how 


FOREIGN  EXCHANGE  283 

large  the  supply,  our  mints,  or  the  Bank  of  England, 
will  buy  it  at  the  price  established  by  law;  and  although 
there  is  no  international  agreement  to  maintain  the 
price,  the  fact  that  gold  is  accepted  by  the  chief  com- 
mercial nations  as  the  one  imiversal  measure  of  values, 
operates  to  prevent  any  attempt  to  change  its  valuation. 
The  price  of  diamonds,  which  are  more  valuable  than 
gold,  is  affected  by  the  supply  and  demand.  Silver, 
used  extensively  as  money,  fluctuates  in  price  like  any 
commodity,  the  supply  and  demand  governing  its  value. 

As  gold  shipments  between  the  United  States  and 
foreign  countries,  particularly  Europe,  are  an  im- 
portant factor  in  foreign-exchange  transactions,  it  may 
interest  you  to  know  how  they  are  handled  and  the 
expense  attending  them. 

Whether  in  coined  pieces  or  bars  (bullion),  the  gold 
is  packed  in  strong  kegs  or  boxes,  securely  strapped 
with  hoop  iron,  and  carefully  sealed  with  private  seals ; 
the  latter  to  discover  if  tampered  with  en  route.  Space 
is  chartered  from  the  steamship  company,  as  in  the 
case  of  merchandise,  although  nearly  all  large  fast 
steamers  have  rooms  especially  constructed  for  such 
valuable  cargo.  At  a  cost  of  about  3-16  of  i  per  cent., 
or  $1,875  for  each  million  dollars  in  value,  the  shipper 
has  it  insured  against  loss.  The  steamship  company 
charges  for  carrying  the  shipment  as  freight  a  rate 
of  about  Ys  per  cent,  of  its  value,  or  about  $1,250  for 
each  million  dollars,  making  a  total  cost  of  about 
$3,125  per  million  dollars.  As  an  extra  safeguard  in 
case  of  large  shipments,  the  steamship  company  details 
special  armed  men  to  guard  the  room  day  and  night, 
and  sometimes  the  shipper  employs  special  detectives 


284  LECTURES  ON  COMMERCE 

in  citizen's  clothes  to  watch  the  passengers  on  the  trip, 
since  it  is  generally  known  several  days  in  advance 
when  large  shipments  of  gold  are  to  be  made. 

In  accordance  with  the  United  States  Mint  regula- 
tions, a  charge  of  four  cents  per  $100  is  made  for  what 
are  known  as  commercial  bars  of  gold,  which  are  from 
990  to  997  thousandths  fine.  The  shipper  has  to  pay 
for  these  bars  with  gold  coin,  which  is  obtainable  with- 
out charge  at  the  subtreasury  in  exchange  for  gold 
certificates  or  for  legal-tender  notes.  There  is  no  re- 
striction upon  the  withdrawals  of  gold  from  the  sub- 
treasury  for  export,  and  the  shipper  has  the  option  of 
taking  coined  pieces,  if  he  prefers,  but  the  loss  by  abra- 
sion of  coined  pieces  practically  equals  the  cost  of  4 
cents  per  $100  charged  by  the  mint  for  commercial 
bars,  which  are  put  up  in  that  shape  to  induce  exporters 
to  take  bars  instead  of  coined  pieces,  and  thus  save  the 
government  the  cost  of  coinage  as  well  as  the  trans- 
portation of  the  bullion  to  the  mint. 

I  shall  not  undertake  to  tell  you  the  names  and 
denominations  of  all  the  coins  or  money  used  in  the 
various  foreign  countries.  It  would  take  too  much 
time,  and  you  would  not  remember  them.  I  shall 
simply  give  you  the  money  of  account  of  the  principal 
countries.  By  "money  of  account"  we  mean  the  kind 
of  money  in  which  the  people  keep  their  accounts,  as, 
for  example,  we  keep  our  accounts  in  dollars  and  cents. 

Commencing  with  North  America,  we  have,  in  ad- 
dition to  the  United  States,  Canada,  Mexico,  Central 
America,  and  we  will  include  the  West  Indies  islands. 

Notwithstanding  Canada  is  a  British  colony,  its 
trade  relations  with  the  United  States  were  too  im- 


FOREIGN  EXCHANGE  285 

portant  to  admit  of  the  adoption  of  the  compHcated 
British  monetary  system,  and  the  accounts  are  kept  in 
dollars  and  cents  as  in  the  United  States.  No  gold  is 
coined,  and  the  United  States  "gold  eagle"  ($10)  and 
the  British  "pound"  or  "sovereign"  are  legal  tender  for 
all  amounts. 

Mexico's  money  of  account  is  the  peso,  or  dollar,  of 
100  centavos,  or  cents — worth  40  to  50  cents  in  our 
money.  Being  one  of  the  chief  silver-producing  coun- 
tries of  the  world,  the  greater  part  of  its  coinage  is  ex- 
ported to  China,  the  Philippines,  and  Central  and  South 
America,  in  which  countries  the  Mexican  peso,  or  dol- 
lar, is  the  favorite  coin. 

The  Central  American  states  all  have  for  their 
unit  of  money  the  peso  of  100  centavos — not  exactly 
like  the  Mexican  peso,  but  more  like  the  peso  of  the 
South  American  States,  which  is  similar  to  the  French 
system — their  unit  being  equal  to  about  5  francs. 

There  are  many  islands  comprising  the  group 
known  as  the  West  Indies  islands.  Porto  Rico,  as  you 
know,  is  owned  by  the  United  States,  and  Cuba  was 
until  recently  practically  controlled  by  us.  At  both 
islands  efforts  are  being  made  to  supplant  the  Spanish 
peseta  with  the  American  dollar  as  the  money  of  ac- 
count. Most  of  the  other  islands  are  possessions  or 
colonies  of  European  countries,  and  as  a  rule  keep  their 
accounts  in  the  money  of  their  mother-country. 

In  South  America,  Uruguay,  Paraguay,  the  Argen- 
tine Republic,  Columbia,  and  Chili  use  the  peso  of  100 
centavos,  as  in  Central  America.  Brazil  uses  the  mil- 
reis  of  1,000  reis;  Peru,  the  sol  of  10  dineros,  each 
dinero  being  equal  to   10  centavos,  or  cents;  Bolivia 


286  LECTURES  ON  COMMERCE 

calls  its  unit  the  boliviano  of  lOO  centavos,  and  Ecua- 
dor, the  Sucre  of  lOO  centavos.  The  value  of  their 
units  in  our  money  fluctuates,  but  is  approximately 
50  cents. 

In  drawing  drafts  on  Central  and  South  America, 
and  to  some  extent  on  Mexico,  they  are  for  United 
States  dollars  payable  in  New  York,  which  are,  of 
course,  cashed  in  the  money  of  the  country  where  pay- 
able, at  the  current  rate  of  exchange  on  New  York. 

In  Africa,  Egypt's  money  of  account  is  the  Egyp- 
tian pound  of  100  piastres,  which,  although  of  greater 
value  intrinsically,  is  worth  less  commercially  than  the 
British  pound  sterling.  Algeria  is  a  French  colony, 
and  uses  the  French  system;  and  the  same  is  true  of 
Madagascar,  the  third  largest  island  in  the  world. 

Cape  Colony,  Natal,  Sierra  Leone,  and  Zanzibar  are 
British  colonies  and  use  the  English  pound  sterling  as 
their  unit;  and  the  South  African  Republic  (or  Trans- 
vaal) and  Orange  Free  State  do  likewise  to  facilitate 
their  commerce  with  adjoining  states. 

In  Oceanica,  the  islands  of  Australia,  New  Zealand, 
Tasmania,  and  a  portion  of  Borneo  use  the  British 
pound  sterling  by  reason  of  being  British  colonies;  and 
Java  and  Sumatra,  colonies  of  Holland,  use  the  gulden 
or  guilder. 

Japan's  money  of  account  is  the  yen  of  100  sen — 
which  formerly  was  worth  about  $1,  but  in  1898  its 
value  was  reduced  to  about  50  cents. 

At  the  Philippines,  although  now  possessions  of  the 
United  States,  preference  is  given  to  the  Mexican  dol- 
lar as  formerly,  which  is  worth  in  our  money  from 
45  to  50  cents,  according  to  the  market  price  for  silver. 


\^^M^^^'^ 


fV^*** 


FOREIGN  EXCHANGE  287 

India  or  British  India,  with  its  population  of  nearly 
225,000,000 — three  times  that  of  the  United  States — 
has  for  its  money  of  account  the  rupee  of  16  annas,  i 
anna  being  equal  to  4  pice  and  i  pice  equal  to  3  pie — 
not  "the  kind  of  pie  our  mothers  used  to  make.'l^  JThe 
value  of  the  rupee  in  our  money  is  about  33  cents. 
India,  being  a  very  poor  country,  uses  coins  of  very 
small  value,  the  smallest  coin  (the  pie)  being  worth 
about  34  cent  in  our  money. 

Hong  Kong  is  a  small  island  just  off  the  coast  of 
China.  Victoria,  the  capital,  and  practically  the  only 
place  there,  has  a  population  of  nearly  200,000.  Most 
of  the  trade  of  China  with  the  rest  of  the  world  is  done 
through  Victoria,  or,  as  we  know  it  best.  Hong  Kong. 
The  money  of  account  of  Hong  Kong  is  the  dollar  of 
100  cents,  but,  as  in  other  oriental  countries,  the  Mexi- 
can dollar  is  preferred  to  the  local  currency. 

China  has  several  kinds  of  money — the  dollar  of 
100  cents;  also  a  silver  coin  called  tael.  The  latter 
varies  in  value  according  to  the  locality  and  the  price  of 
silver  in  London.  But  the  Mexican  dollars  constitute 
the  principal  circulating  medium.  In  fixing  the  valua- 
tion of  the  Haikwan  tael  for  the  purpose  of  adjusting 
the  Chinese  indemnity,  resulting  from  the  recent  war 
there,  the  plenipotentiaries  made  the  equivalent  in 
American  money  74  2-10  cents. 

Like  India,  China  is  a  very  poor  country,  and  the 
coins  most  extensively  used  are  of  very  small  value. 
They  have  a  coin  called  "cash,"  about  the  size  of  our 
silver  quarter  (25-cent  piece),  made  of  copper  and 
zinc,  with  a  square  hole  in  the  center;  I  suppose  you 
have  seen  them.     One  thousand  of  these  are  issued  on 


288  LECTURES  ON  COMMERCE 

a  string — that's  what  the  hole  is  for — the  lot  being 
equivalent  to  about  $i  in  our  money,  or  i-io  of  a  cent 
each. 

I  have  now  given  you  a  general  idea  of  the  kinds  of 
money  in  use  in  the  countries  of  North  and  South 
America,  Asia,  Africa,  and  the  principal  islands  of 
the  Atlantic  and  Pacific '  oceans.  We  now  come  to 
Europe,  with  which  our  financial  and  trade  relations 
are  of  more  importance  than  all  the  others  combined. 

France,  Belgium,  Switzerland,  Italy,  Greece,  Spain, 
Roumania,  Servia,  Bulgaria,  Finland,  and  Austria- 
Hungary  have  the  same,  or  very  similar,  monetary 
systems,  the  first  five  countries  named  comprising  what 
is  known  as  the  "Latin  Union  countries" — a  union 
formed  for  the  adoption  of  a  uniform  monetary  sys- 
tem. The  other  countries  adopted  the  same  system, 
but  are  not  members  of  the  union. 

France,  Belgium,  and  Switzerland  call  their  unit 
the  franc,  which  is  divided  into  lOO  centimes.  Italy 
calls  the  franc,  or  unit,  the  lira  of  lOO  centesimi. 
Greece  uses  the  unit  named  dracma  of  lOO  lepta;  Spain, 
the  peseta  of  lOO  centimos;  Roumania,  the  lei  of  lOO 
bani;  Servia,  the  dinar  of  lOO  paras;  Bulgaria,  the  lew 
of  lOO  stotinkas;  Finland,  the  finmark  of  lOO  cents; 
and  Austria-Hungary,  the  crown,  or  krone,  of  lOO 
heller.  All  these  units  are  practically  the  same  as  the 
franc  of  France  with  different  names,  their  actual  mint 
valuation  (except  Austria-Hungary)  being  just  the 
same,  19.3  cents. 

Germany's  money  of  account  is  the  reichsmark,  or 
mark,  as  we  call  it,  of  100  pfennige.  A  mark  is  worth 
about  24  cents  in  our  money. 


I   UN'IVERSITY    j 
\  '  / 

FOREIGN  EXCHANGE  289 

Norway,  Sweden,  and  Denmark,  known  as  the 
Scandinavian  countries,  have  for  their  unit  the  krone, 
or  crown,  of  100  ores,  its  value  in  our  money  being 
about  2y  cents. 

Holland  has  the  gulden  or  guilder  of  100  cents, 
worth  about  40  cents  in  our  money. 

Russia  uses  for  its  unit  the  ruble  of  100  kopecks, 
worth  about  52  cents  in  our  money. 

Portugal,  like  Brazil,  has  for  its  unit  the  milreis, 
equal  to  1,000  reis,  its  value  in  our  money  being  about 
$1.08. 

Foremost  among  all  nations  of  the  earth  in  the 
magnitude  of  its  commerce,  its  vast  colonial  posses- 
sions and  dependencies,  and  consequently  its  impor- 
tance as  the  chief  financial  center.  Great  Britain  fur- 
nishes the  most  interesting  study  of  the  money  of  the 
world.  Every  school  child  can  tell  you  the  money  of 
account  of  Great  Britain.  What  possessed  them  to 
adopt  such  a  complicated,  cumbersome  system  is  a  mys- 
tery to  nearly  everyone.  The  pound  sterling  is  equal 
to  20  shillings,  each  shilling  being  equal  to  12  pence, 
and  each  pence  equal  to  4  farthings.  Without  excep- 
tion the  sovereign  is  the  most  universally  recognized 
coin,  and,  except  the  Egy^ptian  pound,  it  is  the  largest 
of  units  of  money.  Its  actual  value  in  our  money  is 
about  $4.87. 

Probably  more  foreign  exchange  is  drawn  in  ster- 
ling— here  and  in  other  countries  as  well — than  in  the 
money  of  all  other  countries  combined.  This  is  due, 
however,  to  the  fact  that  London  is  the  financial  center 
of  the  world,  and  exchange  on  that  city  is  generally 
acceptable,  if  not  preferred.   For  the  same  reason  prob- 


290  LECTURES  ON  COMMERCE 

ably  90  per  cent,  of  all  letters  of  credit  issued  through- 
out the  world  are  drawn  in  English  money. 

The  term  "rate  of  exchange"  means  the  value  or  the 
price  of  the  money  of  one  country  reckoned  in  the 
money  of  any  other  country,  the  value  being  a  fixed 
rate  of  exchange,  the  price  a  fluctuating  rate  of  ex- 
change. 

The  rate  of  exchange  quoted  between  any  two  coun- 
tries is  for  drafts,  checks,  or  bills  of  exchange,  and 
the  price  includes,  besides  the  actual  equivalent  of  the 
standard  coin,  some  allowance  for  interest  according 
to  the  tenor  of  the  draft,  and  a  premium  which  the 
seller  demands  for  the  economy  and  superior  conven- 
iences of  his  draft  or  check  as  compared  with  a  remit- 
tance in  currency  or  bullion.  This  premium,  which 
represents  the  fluctuation,  is  more  or  less  according  to 
the  amount  of  exchange  in  the  market  for  sale  and  the 
demand  for  the  same- 
There  are  two  kinds  of  exchange — direct  and  arbi- 
trated. Direct  is  when  between  any  two  countries; 
arbitrated,  when  between  two  places  in  different  coun- 
tries through  the  medium  of  some  other  place  in  an- 
other country — or,  to  express  it  more  clearly,  the 
remitting  of  money  to  one  country  through  another 
country,  or  the  buying  of  exchange  of  one  country 
through  another. 

The  occasion  for  the  arbitration  of  exchange  will 
arise  when  the  rate  of  exchange  here  direct  upon  a 
country  to  which  you  wish  to  remit  is  much  higher 
than  between  that  country  and  another  country  near  by. 
For  illustration :  Through  the  financial  columns  of 
our  daily  papers,  or  by  cabled  information  direct,  the 


FOREIGN  EXCHANGE  291 

rate  for  a  check  in  London  on  Paris  or  Berlin,  or  vice 
versa,  is  furnished.  It  generally  reads,  for  example, 
this  way:  "Exchange  on  Paris  F.  25.12 — Exchange 
on  Berlin  M.  20.42."  This  signifies  that  you  can  buy 
in  London,  for  instance,  a  check  payable  in  Paris  at 
the  rate  of  25  francs  12  centimes  per  pound  sterling, 
or  on  Berlin  at  the  rate  of  20  marks  42  pfennige  per 
pound  sterling.  Therefore,  if  you  had  occasion  to 
remit  a  large  sum  to,  say,  Berlin,  and  you  found  you 
could  buy  a  check  on  London  and  have  the  amount 
remitted  from  London  to  Berlin  cheaper  than  you 
could  remit  to  Berlin  direct,  the  transaction  would  be 
termed  "arbitration  of  exchange."  All  large  banking 
houses  and  jobbers  of  foreign  exchange  watch  the  quo- 
tation on  exchange  between  countries  very  closely,  and 
always  avail  themselves  of  any  advantage  to  be  gained 
by  remitting  to  one  country  through  another. 

The  fluctuation  in  the  price  of  exchange,  or,  as  it  is 
termed,  "the  rate  of  exchange,"  is  due  to  a  number  of 
causes.  If  the  value  of  the  goods  we  exported  greatly 
exceeded  the  value  of  the  goods  we  imported  during  a 
certain  period,  the  large  balance  due  us  from  other  coun- 
tries would,  if  there  were  no  other  international  trans- 
actions to  offset  them,  cause  the  price  of  exchange  here 
to  be  lower,  for  the  reason  that  there  would  be  less 
demand  for  remittance  to  foreign  countries,  since  it  is 
always  the  difiference  between  the  debits  and  credits 
that  is  remitted.  On  the  other  hand,  if  we  owed  for- 
eign countries  a  much  greater  amount  than  they  owed 
us,  exchange  here  would  be  higher  by  reason  of  in- 
creased demand  for  it. 

But  it  is  not  alone  our  foreign  commercial  trade  that 


292  LECTURES  ON  COMMERCE 

regulates  the  price  of  exchange.  The  monetary  condi- 
tions here  and  abroad  may  entirely  offset  other  con- 
ditions. 

When  the  loaning  rate  for  money  here  is  high,  cap- 
italists and  bankers  will  loan  their  money  here,  instead 
of  investing  in  foreign  commercial  bills,  which  causes 
less  demand  for  bills,  hence  lower  rates.  If  rates 
for  money  abroad  are  high,  there  will  be  a  greater 
demand  for  commercial  bills  or  other  exchange  on  for- 
eign countries,  for  the  purpose  of  getting  their  money 
to  those  countries  to  take  advantage  of  such  high  rates, 
thereby  causing  higher  rates.  If  the  rates  for  money 
abroad  are  lower  than  here,  as  was  the  case  during 
nearly  all  of  the  year  1901,  our  capitalists  and  bankers 
would  borrow  money  in  their  markets  for  investment 
here,  thus  increasing  our  indebtedness  to  foreign  coun- 
tries, and  when  such  loans  became  due  there  would  be 
an  increased  demand  for  exchange  to  pay  these,  result- 
ing in  higher  rates. 

The  discount  rates  at  London,  Paris,  Berlin,  and 
other  European  centers  very  materially  affect  the  buy- 
ing and  selling  price  for  commercial  bills  drawn 
against  commodities  exported.  These  discount  rates 
are  the  rate  per  cent,  at  which  commercial  paper  of  the 
different  classes  may  be  discounted — that  is,  the  allow- 
ance made  for  cashing  or  taking  up  the  paper  before 
maturity  or  before  due  and  payable.  These  discount 
rates  fluctuate  according  to  the  conditions  prevailing, 
as  does  the  rate  of  exchange.  When  discount  rates 
abroad  are  high,  the  rate  for  commercial  bills  here 
will  be  lower,  and  when  low  abroad,  the  rate  for  com- 
mercial bills  here  will  be  higher. 


FOREIGN  EXCHANGE  293 

Under  normal  conditions,  the  rates  for  foreign  ex- 
change fluctuate  between  what  are  termed  gold- 
exporting  or  gold-importing  points,  which  means  the 
actual  cost  of  the  gold  plus  the  cost  of  transporting  it 
from  one  point  to  another.  For  example :  If  you 
wished  to  remit,  say,  to  London  the  equivalent  of 
£50,000  (or  approximately  $250,000),  and  you  found 
that  the  cost  of  the  gold  coin  or  bullion  and  the  ex- 
pense of  freight,  insurance,  commissions,  etc.,  would 
be  considerably  less  than  the  cost  of  a  draft  or  check 
for  the  amount  on  London,  then  you  would  ship  gold 
in  preference.  If  the  cost  were  equal  or  greater  for 
shipping  gold,  then  you  would  remit  by  check,  as  it 
would  be  more  convenient  and  less  risk.  Therefore 
the  rates  naturally  do  not  go  much  above  or  much  be- 
low the  gold  points. 

When  the  rate  for  demand  sterling  exchange  gets 
down  to,  say,  $4.83^  to  $4.84  per  pound,  it  is  cheaper 
to  import  gold.  If  such  exchange  reaches  as  high  as 
$4.8834  to  $4.88^  per  pound,  then  gold  can  be  ex- 
ported equally  cheaply. 

But  notwithstanding  these  various  conditions  which 
affect  the  market  price  for  foreign  exchange,  it  is  the 
supply  and  demand  that  regulate  the  price,  as  in  the 
case  of  wheat,  corn,  or  any  commodity. 

"Par  of  exchange"  means  equal  of  exchange.  There 
is  a  "mint  par  of  exchange,"  and  also  what  might  be 
termed  a  "commercial  par  of  exchange." 

The  "mint  par  of  exchange"  between  the  United 
States  and  foreign  countries  is  the  actual  value  in  our 
money  of  the  pure  metal  contained  in  the  coins  repre- 
senting the  units  of  money  of  the  various  countries. 


294  LECTURES  ON  COMMERCE 

The  director  of  the  United  States  Mint  is  required  at 
stated  periods  in  each  year  to  proclaim  the  values  of 
these  coins  or  units  in  our  money  for  the  purpose  of 
computing  the  worth  of  importations  of  goods  and  also 
the  amount  of  customs  duties  assessable  thereon.  The 
value  of  gold  coins,  as  fixed  by  the  director  of  the  mint, 
rarely  ever  changes,  since  the  weight  and  fineness  of 
the  gold  units  of  countries  are  fixed  by  law — in  the 
United  States  by  act  of  Congress,  in  Great  Britain  by 
act  of  Parliament. 

The  mint  par  of  exchange  of  the  English  pound  or 
sovereign  in  our  money  is  $4.8665;  of  the  French 
franc  and  the  franc  of  the  Latin  Union  countries,  19.3 
cents;  of  the  German  mark,  23.8  cents;  of  the  Scan- 
dinavian krone,  26.8  cents ;  and  of  the  Holland  gulden 
or  guilder,  40.2  cents ;  and  for  many  years  it  has  been 
the  same.  While  these  values  as  furnished  are  not  ex- 
actly correct,  they  are  sufficiently  accurate  to  serve  the 
purpose  intended,  and  are  accepted  for  all  computa- 
tions at  the  custom  houses. 

To  determine  the  actual  mint  par  of  exchange  be- 
tween any  two  countries,  it  is  necessary  only  to  divide 
the  weight  of  the  pure  gold  in  the  gold  unit  of  the  one 
country  by  the  weight  of  the  pure  gold  in  the  coin  of 
the  other  country.  The  mint  par  of  exchange  between 
the  United  States  and  countries  having  silver  monetary 
units  is  arrived  at  in  the  same  way,  but  as  the  price  of 
silver  fluctuates,  the  value  of  silver  coins  frequently 
changes. 

As  an  illustration  of  how  the  pars  of  exchange  are 
arrived  at,  we  will  take  for  example  the  mint  par  of 
exchange  between  the  United  States  and  Great  Britain. 


FOREIGN  EXCHANGE  295 

Our  gold  dollar  (which  is  our  unit  or  money  of  ac- 
count) weighs  gross  25.8  troy  grains  and  is  9-10  fine, 
I- 10  alloy  being  allowed  to  increase  its  durability, 
w^hich,  if  deducted,  leaves  23.22  troy  grains  of  pure 
gold.  The  sovereign  contains  gross  123.274478  troy 
grains,  and  is  11-12  fine,  which  leaves  the  pure  gold 
in  the  sovereign  1 13.001603  troy  grains,  which,  if 
divided  by  23.22,  the  pure  gold  in  the  United  States 
dollar,  gives  $4.866560,  the  mint  par  of  exchange. 

If  you  divide  the  value  of  the  sovereign  ($4.8665) 
by  20  (there  being  20  shillings  to  the  pound),  it  will 
give  you  the  actual  value  of  the  shilling  in  our  money, 
or  if  you  divide  it  by  240,  the  number  of  pence  to  the 
pound,  it  wall  give  you  the  value  of  the  penny  in  our 
money  (a  fraction  over  2  cents). 

Now%  as  to  the  commercial  par  of  exchange,  if  you 
add  to  the  mint  par  of  exchange  between  two  countries 
the  cost  of  transferring  the  coin  or  bullion,  which  in- 
volves freight  charges,  insurance,  interest,  commis- 
sions, and  sometimes  discounts,  you  will  arrive  at  what 
would  be  termed,  under  normal  conditions,  the  "com- 
mercial par  of  exchange,"  or  the  amount  necessary  to 
discharge  a  debt  of  a  merchant  in  one  country  to  a 
merchant  in  another  country. 

In  further  illustration  of  the  commercial  par  of 
exchange,  if  the  United  States  owed  England  exactly 
the  same  amount  that  England  owed  us,  the  debts  be- 
tween these  two  countries  could  be  paid  wathout  the 
intervention  of  money,  and  the  commercial  price  of 
exchange  would  be  at  par.  If,  however,  we  owed  Eng- 
land a  greater  amount  than  it  owed  us,  exchange  here 
would  be  higher,  and  in  England  low^er,  and  vice  versa. 


296  LECTURES  ON  COMMERCE 

In  other  words,  exchange  in  the  United  States  would 
be  at  a  premium,  and  in  England  at  a  discount,  the 
premium  in  one  case  being  about  equal  to  the  discount 
in  the  other. 

Quotations  for  foreign  exchange,  such  as  checks, 
drafts,  commercial  bills,  etc.,  are  rarely  understood  ex- 
cept by  those  familiar  with  the  business.     In  quoting 
the  rate  of  exchange  for  drafts,  checks,  etc.,  on  coun- 
tries other  than  France,  Germany,  and  sometimes  Italy, 
the  rate  quoted  is  per  single  unit,  that  is,  so  much  in 
our  money  per  pound  sterling  on  England,  krone  on 
Norway,  Sweden,  and  Denmark,  ruble  on  Russia,  etc. 
Exchange  on  France  and  Germany,  when  quoted  by 
dealers  at  smaller  places,  would  be  the  same — so  much 
per  single  franc  or  mark;  but  in  the  larger  cities  it  is 
the  custom,  when  quoting  rates  for  francs,  to  quote 
the  number  of  francs  and  centimes  that  will  be  allowed 
per  $1,  as,  for  example,  5.15^ — meaning  that  for  each 
$1  you  would  be  allowed  5  francs  155/3  centimes.     On 
Germany  the  quotation  would  be  for  4  marks  instead 
of  I ;  for  example,  95  5-16 — meaning  that  for  each  4 
marks  you  would  have  to  pay  95  5-16  cents.  The  allow- 
ance of  ^i  of  a  centime  per  $1,  considering  that  one 
whole  centime  is  worth  only  1-5  of  a  cent  in  our  money, 
and  a  fraction  like  5-16  of  a  cent  in  our  money  on  4 
marks,  no  doubt  seems  to  you  like  a  very  small  item, 
but  on  a  transaction  of  100,000  francs  (about  $19,400 
in  our  money)  ^  of  a  centime  per  dollar  would  make 
a  difference  of  over  $28,  and  5-16  of  a  cent  per  4 
marks  on  100,000  marks  (about  $24,800)  would  be  a 
difference  of  over  $78,  or  over  $15  on  each  1-16  of 
a  cent. 


FOREIGN  EXCHANGE  297 

One  peculiarity  in  the  French  quotations  is  that  the 
rate  is  always  advanced  or  lowered  by  ^  of  a  centime ; 
for  illustration,  the  next  lower  rate  to  5.15  would  be 
5.15^,  then  5.i6>4,  5-i6%,  S-i?^.  etc.,  there  being 
just  ^  between  each  quotation.  Bear  in  mind,  the 
greater  the  number  of  francs  and  centimes  allowed  per 
dollar,  the  lower  w^ould  be  the  rate,  since,  as  the  quota- 
tion is  per  $1,  the  more  francs  you  would  receive  for 
your  money.  One  reason  assigned  for  this  method  of 
quoting  the  French  franc,  which  is  the  reverse  of  that 
in  other  kinds  of  exchange,  is  that  5^  of  a  centime  is 
equivalent  to  }■$  of  i  per  cent,  in  the  pound  sterling, 
and  as  most  of  the  French  exchange  was  formerly 
covered  or  paid  through  English  exchange,  this  method 
served  a  convenience  in  figuring.  The  other  reason, 
which  is  given  by  the  Financier  of  New  York,  is  that, 
as  there  are  5  francs  to  the  dollar,  %  of  i  per  cent,  on 
I  franc  would  call  for  ^  of  i  per  cent,  on  5  francs,  the 
equivalent  of  $1. 

But  these  quotations  on  francs  by  ^  of  a  centime, 
though  they  served  every  purpose  a  few  years  ago,  are 
not  now  sufficiently  close  to  meet  the  competition  of 
the  present  day,  and  are  supplemented  with  fractional 
quotations,  such  as  5.159^  —  1-32,  or  5.15^  — 
1-16,  or  5.15^  +  1-32,  etc.  These  plus  or  minus  frac- 
tions do  not  apply  directly  to  the  rate,  but  mean  1-32, 
1-16,  3-32,  etc.,  of  I  per  cent,  plus  or  minus  the  equiva- 
lent amount  in  American  money,  which  is  added  or 
deducted  as  the  case  may  be. 

In  a  publication  entitled  Foreign  Exchange,  recently 
issued  by  myself,  furnishing  conversion  tables  for 
foreign-exchange  transactions,   I  have  undertaken  to 


298  LECTURES  ON  COMMERCE 

have  adopted  a  method  for  quoting  on  French  ex- 
change that  would  do  away  with  those  confusing  frac- 
tional quotations,  by  supplying  conversion  tables  for 
francs,  the  equivalent  of  $1  by  eighths  of  a  centime. 
For  example:  instead  of  jumping  from  5.15  to  5.15^^, 
which  would  now  be  the  next  lower  quotation,  the 
tables  in  this  book  are  for  5.15,  5.i5>^,  5-15/4,  5-i5^, 
5.15^,  and  then  5.15^,  which  practically  serve  the 
same  purpose,  and  avoid  the  complicated  figuring  of 
the  fractions,  plus  or  minus  1-32,  1-16,  or  3-32,  etc.,  of 
I  per  cent.,  mentioned ;  and  I  look  for  its  general  adop- 
tion in   the  near   future. 

Quotations  for  German  exchange,  where  quoted  for 
4  marks  instead  of  a  single  mark,  are  also  supplemented 
by  the  plus  or  minus  fractional  quotations;  as,  for  ex- 
ample, if  95  5-16  per  4  marks  was  thought  a  little  too 
high,  it  will  be  quoted  95  5-16  minus  1-32  of  i  per 
cent.,  which  on  a  transaction  of  100,000  marks  would 
make  a  difference  of  about  $7.50. 

In  large  transactions  the  quotations  on  English  ex- 
change (which  are  generally  confined  to  eighths  of 
a  cent  per  pound)  are  often  supplemented  with  the 
quotation'^plus  i.^,'  which  means  $1  additional  will  be 
charged  on  each  1,000  pounds,  making  a  difference  of 
10  points  in  the  rate.  That  is,  a  quotation  of  4.8734 
phis  1. 00 'would  be  $4.8735,  and  it  is  not  unusual  in 
very  large  transactions  to  advance  or  lower  the  rate 
by  five  hundredths  of  a  cent  per  pound,  such  as  4.87 — 
4.8705 — 4.8710,  4.8715,  etc.,  each  five  hundredths  of 
a  cent  per  pound  making  a  difference  of  $5  on  each 
10,000  pounds,  or  $250  on  a  transaction  of  500,000 
pounds  (nearly  $2,500,000  in  our  money),  often  made 
by  large  financial  institutions  in  a  single  day. 


FOREIGN  EXCHANGE  299 

I  have  here  a  cHpping  from  the  Chicago  Daily 
Tribune,  quoting  the  rates  for  "foreign  exchange." 
Under  the  heading  "Foreign  Exchange  Market"  it 
starts  in  by  saying :  "Foreign  exchange  closed  steady 
at  the  following  rates."  "Steady"  means  a  fair  de- 
mand and  prices  likely  to  remain  as  they  are.  "Firm" 
would  mean  good  demand,  with  prices  tending  up- 
ward ;  "strong,"  a  large  demand,  with  prices  certain  to 
go  higher.  "Dull"  or  "weak"  would,  of  course,  mean 
very  little  or  no  demand,  with  prices  tending  lower. 
Under  the  head  of  "selling"  rates  it  gives : 

Cable    transfers,    London 4.88 

Checks,    London 4-87^ 

Checks,   Paris 516^   plus   1-32 

Checks,   Berlin 0.95   7-16 

Checks,    Holland 0.40^ 

"Selling  rates,"  in  this  case,  mean  the  prices  that 
were  charged  customers  who  wished  to  remit  abroad. 

The  first  item,  "cable  transfers,"  is  where  amount  of 
money  desired  to  be  paid  abroad  is  deposited  here,  and 
the  bank  or  concern  with  which  you  are  transacting  the 
business  cables  its  correspondent  abroad  to  pay  the 
amount  to  the  person  at  the  address  you  designate.  Of 
course,  it  would  be  necessary  for  those  making  such 
transfers  to  have  funds  or  credit  abroad  for  such  pur- 
pose. When  it  is  desired  to  have  money  paid  at  in- 
terior places,  the  cablegram  will  be  sent  to  the  nearest 
city  at  which  the  bank  or  concern  here  has  funds,  and 
it  will  be  forwarded  by  mail  from  there,  causing  a 
delay  of  perhaps  only  a  few  hours.  Ordinarily,  within 
one  or  two  hours  from  the  time  you  deposit  the  money 
here  it  will  be  paid  to  the  person  abroad  whom  you 
designate. 


300  LECTURES  ON  COMMERCE 

The  quotations  for  checks  London,  checks  Paris, 
and  checks  Berhn  are  the  rates  at  which  they  would 
have  sold  you  a  demand  check  or  draft  payable  at  those 
particular  cities.  If  you  had  wanted  a  check  payable 
at  some  other  point  in  Great  Britain,  France,  or  Ger- 
many, they  undoubtedly  w^ould  have  charged  you  a 
higher  rate,  since  their  balances  are  kept  only  at  prin- 
cipal trade  centers,  and  their  arrangements  for  pay- 
ment of  their  paper  at  interior  or  other  points  are  that 
the  bank  correspondents  there  will  honor  their  paper 
and  reimburse  themselves  by  drawing  upon  the  trade 
centers  for  the  amount  plus  their  commission  for  cash- 
ing, hence  adding  to  the  cost  of  performing  the  service. 

The  next  item  is  "checks  Holland  40^."  This 
means  they  would  charge  for  a  check  or  draft  on  any 
point  in  Holland  at  the  rate  of  40^  cents  per  gulden 
or  guilder — the  money  of  that  country. 

Following  the  above  there  appears  in  this  clipping 
the  heading  "Buying  Rates,"  which  means  the  rates  at 
which  the  banks  purchased  the  various  classes  of  com- 
mercial paper  named.    The  quotations  are  as  follows : 

60  days  London   bankers 484^ 

60  days  London    documentary 4-84^ 

3  days  Antwerp 518^   less    1-32 

3  days  Hamburg 0.9514  plus   1-32 

60  days  Holland 0.39    15-16 

The  first  quotation,  "60  days  London  bankers 
4.84^,"  is  for  drafts  drawn  by  bankers  payable  sixty 
days  after  sight  (meaning  after  acceptance  abroad) 
against  their  account  in  a  bank  upon  which  draft  is 
drawn.  The  banker  issuing  such  draft  has  60  days  (if 
necessary)  in  which  to  place  funds  abroad  to  meet  pay- 
ment of  this  draft;  therefore  a  bank  will  often  sell  its 


FOREIGN  EXCHANGE  301 

sixty-day  draft  with  the  behef  that  it  will  be  able  to 
purchase  and  place  the  amount  abroad  to  meet  the  same 
before  draft  is  due,  at  a  lower  rate  than  at  which  it  sold, 
and  thus  make  a  profit.  There  are  other  cases  where  a 
bank  will  sell  its  sixty-day  draft  on  the  market  to  ob- 
tain the  use  of  the  money  for  that  period. 

The  next  item,  "60  days  London  documentary 
4.84^,"  is  what  is  known  as  a  foreign  commercial  bill 
of  exchange,  which  I  will  explain  more  fully  later. 
The  documents  referred  to  are  the  bills  of  lading  and 
the  insurance  certificates,  representing  a  shipment  of 
goods  abroad.  The  draft  is  drawn  payable  sixty  days 
after  sight,  which  is  the  time  credit  extended  to  pur- 
chaser by  the  seller. 

The  three-day  quotations  mentioned  on  Antwerp 
and  Hamburg  are  for  drafts  payable  three  days  after 
sight.  The  custom  of  drawing  drafts  three  days  after 
sight  on  points  in  European  countries  outside  of  Great 
Britain  is  because  no  days  of  grace  are  allowed  on  the 
continent  as  in  Great  Britain,  and  the  three  days  are 
granted  to  insure  payment  being  made,  and  thus  avoid 
"protest  fees,"  which  often  are  very  exorbitant. 

The  sixty-day  Holland  bills  are  issued  and  paid 
under  practically  the  same  conditions  as  the  sixty-day 
London  bankers  just  mentioned,  although  drawn 
against  commodities  exported.  They  are  what  is 
termed  "clean  bills,"  by  reason  of  there  being  no  docu- 
ments attached. 

I  have  also  clipped  from  the  paper  the  following 
items  which  pertain  to  foreign  exchange  transactions: 
Under  the  head  of  "Money  Markets  of  the  World"  it 
reads:     "Discounts  at  London,  2^  per  cent.;  Paris, 


302  LECTURES  ON  COMMERCE 

2  7-16  per  cent.;  Berlin,  1%  per  cent."  Foreign  dis- 
count rates  mean  the  rate  per  cent,  charged  or  ahowed 
on  drafts  discounted  or  paid  before  due.  These  par- 
ticular rates  mentioned  apply  to  drafts  drawn  on 
bankers. 

Here  is  also  another  newspaper  clipping :  "Sterling 
exchange — posted  rates  4.88,  actual  rates  4.87^^,  docu- 
mentary rates  4.84."  Posted,  or  nominal,  rates  are 
those  posted  daily  on  bulletins  of  leading  New  York 
dealers  in  exchange  for  use  of  the  general  public,  and 
apply  more  particularly  to  smaller  sums.  Actual  rates 
are  inside  terms  made  to  brokers  or  large  buyers  for 
large  sums.  Documentary  rates  are  for  commercial 
bills  of  exchange. 

Here  is  another  newspaper  quotation,  which,  while 
not  applying  directly  to  foreign  exchange,  materially 
affects  its  rates  in  the  western  market :  "New  York 
exchange — 30  cents  discount  before  clearings,  40  cents 
discount  after  clearings."  The  expressions  "before" 
and  "after  clearings"  mean  before  or  after  the  meeting 
of  the  bank  clearing-house,  a  meeting  held  each  day 
about  1 1  a.  m.  by  representatives  of  the  different  banks 
to  exchange  debits  and  credits  with  each  other.  "New 
York  exchange"  means  checks  payable  by  a  bank  in 
New  York.  Thirty  cents  discount  in  this  case  would 
mean  that  New  York  exchange,  in  sales  between 
banks  (not  as  a  rule  with  the  public),  would  be  sold 
at  a  discount  of  30  cents  for  each  $1,000.  If  New 
York  exchange  were  quoted  at  a  premium  of  30  cents, 
they  would  charge  30  cents  additional  per  $1,000.  The 
reason  why  the  rates  for  New  York  exchange  affect  the 
rates  for  foreign  exchange  in  the  West  is  that  the  rates 


FOREIGN  EXCHANGE  303 

in  the  West  and  elsewhere  in  the  United  States  are 
based  on — or  I  might  say  controhed  by — the  rates  in 
New  York,  becanse  New  York  is  the  principal  buying 
market.  Therefore  if  New  York  exchange  here  is 
at  a  discount,  on  large  transactions  banks  would  sell 
you  a  draft  on  London  or  other  foreign  city  at  the  rate 
of  30  cents  per  $1,000,  less  than  you  could  buy  it  for 
in  New  York;  or,  if  at  a  premium,  the  rate  w^ould  be 
that  much  per  $1,000  higher  than  New  York  rates, 
providing  of  course  you  paid  in  cash  or  local  funds. 

The  basis  of  a  foreign  bill  of  exchange  is,  as  its 
name  implies,  a  commercial  transaction  of  international 
character,  which  consists  in  the  purchase  of  goods  or 
commodities  in  one  country  for  export  to  another 
country.  The  draft  represents  the  money  value  of  the 
goods  which  is  due  the  exporter.  The  bill  of  lading  is 
the  contract  between  the  transportation  company  and 
the  shipper  for  the  carrying  of  the  goods,  and  also 
serves  as  the  order  for  their  delivery.  The  insurance 
certificate  is  the  certification  of  the  marine  insurance 
company  of  reimbursement  in  case  goods  are  lost  by 
fire  or  accident  while  en  route  on  the  ocean.  These 
three  documents — the  draft,  bill  of  lading,  and  insur- 
ance certificate — comprise  what  is  termed  a  foreign 
commercial  bill  of  exchange.  They  are  almost  invaria- 
bly issued  in  duplicate  for  fear  one  set  may  be  lost  in 
its  transmission  abroad  by  mail,  one  of  each  set  being 
marked  ''original,"  the  other  "duplicate;"  or  some- 
times one  of  the  drafts  will  read  "first  of  exchange," 
the  other  "second  of  exchange."  Foreign  commercial 
bills  of  exchange  are  also  known  as  "documentary  bills 
of  exchange,"  by  reason  of  the  bill  of  lading  and  in- 


304  LECTURES  ON  COMMERCE 

surance  certificate  accompanying  the  draft.  It  is  cus- 
tomary to  send  the  originals  of  the  three  documents  by 
first  steamers,  the  dupHcates  or  seconds  by  following 
steamer.  If  the  original  set  is  lost,  the  duplicate  will 
serve  the  same  purpose. 

Trade  between  countries  may  be  said  to  be  con- 
ducted in  a  manner  somewhat  similar  to  that  employed 
here  between  cities  or  towns,  except  that  the  method 
of  payment  or  reimbursement  to  the  shipper  necessa- 
rily differs  by  reason  of  greater  distance,  the  difference 
in  kind  of  money  used,  and  commercial  customs  in 
the  two  countries.  To  obtain  payment  for  goods 
shipped  to  a  foreign  country  which  perhaps  would  not 
arrive  at  their  destination  for  several  weeks  and  possi- 
bly months,  according  to  distance,  and  whether  by  fast 
or  slow  steamer,  to  say  nothing  of  the  fact  that  to  some 
countries  steamers  only  leave  our  ports  semi-monthly 
or  monthly,  it  is  the  usual  custom  of  the  shipper,  whom 
we  term  the  exporter,  to  sell  his  commercial  bill  of 
exchange  against  the  shipment  in  advance  to  the  high- 
est bidder;  and  he  rarely  experiences  any  difficulty  in 
finding  a  ready  purchaser. 

Our  exporters,  in  competing  with  foreign  manufac- 
turers, must  take  into  consideration  cost  of  transporta- 
tion, insurance  on  goods,  customs  duties,  difference  in 
value  of  money,  and  the  probable  price  at  which  they 
can  discount  or  sell  their  commercial  bill  against  the 
same.  Time  credit  must  also  be  extended  to  the  buyer. 
If  our  exporters  had  to  wait  for  payment  until  the 
maturity  of  their  bills,  it  would  mean  the  tying  up  of 
a  large  amount  of  capital  and  possibly  prevent  their 
competing  successfully. 


FOREIGN  EXCHANGE  305 

The  process  by  which  a  foreign  commercial  bill  of 
exchange  drawn  against  commodities  exported  is  crea- 
ted and  handled,  and  reaches  its  termination,  may  best 
be  illustrated  by  an  actual  transaction,  and  I  have  ob- 
tained for  such  purpose  exact  copies  of  a  commercial 
bill  of  exchange  drawn  against  a  shipment  of  flour 
made  by  a  leading  exporter — flour  being  one  of  our 
chief  exportable  commodities. 

The  shipment  of  flour  in  question,  destined  to  Liver- 
pool, England,  was  delivered  to  the  Soo  freight  line  at 
Minneapolis,  operating  over  the  Minneapolis,  St.  Paul 
&  Sault  Ste.  Marie  and  Canadian  Pacific  Railroads, 
and  a  through  bill  of  lading  in  duplicate  was  obtained. 
This  through  bill  of  lading  is  a  form  of  contract,  issued 
by  special  arrangements  with  connecting  ocean  steam- 
ship lines,  by  the  terms  of  which  it  is  agreed,  under 
conditions  printed  thereon,  to  transport  the  shipment 
through  to  the  destination  at  the  foreign  port  (Liver- 
pool). It  states  the  number  of  packages,  how  they  are 
marked,  their  contents,  the  particular  grade  or  brand 
of  flour,  and  the  name  and  location  of  the  party  for 
whom  the  goods  are  intended.  It  is  negotiable  only  by 
indorsement  of  the  exporter. 

Upon  presentation  of  this  evidence  of  shipment,  a 
marine  insurance  company  has  issued  a  certificate  of 
insurance,  under  the  terms  of  which  it  agrees  to  reim- 
burse the  owner  of  the  goods  in  case  of  the  loss  of  the 
shipment  by  fire  or  accident  while  en  route  on  the  ocean. 
This  shipment,  as  is  the  usual  custom,  is  insured  for 
about  10  per  cent,  in  excess  of  its  billed  value. 

The  exporter  then  attaches  to  these  documents  a 
draft  for  the  amount  for  which  the  flour  was  sold, 


3o6  LECTURES  ON  COMMERCE 

namely,  £457  12s.  lod.  Had  this  shipment  been  des- 
tined to  a  point  in  Germany,  the  draft  would  have  been 
drawn  in  marks;  if  to  France,  in  francs;  etc. ;  usually  in 
the  money  of  the  country  where  it  is  going;  but  quite 
often  it  will  be  drawn  in  English  money,  although 
going  to  some  other  country,  by  reason  of  English 
exchange  being  preferred. 

In  this  case  the  exporter  agreed  to  allow  the  buyer 
sixty  days'  time  in  which  to  pay  the  draft,  after  its 
presentation.  The  draft  reads  "60  days  after  sight  of 
this  first  of  exchange  (second  unpaid),  pay  to  the  order 
of  ourselves  457  pounds  12  shillings  and  10  pence, 
against  Soo  line,  through  B.L.  No.  B.  1548,  dated  May 
16,  1901,  for  2,000  sacks  of  flour  branded  Dakota,"  and 
is  signed  Northwestern  Consolidated  Milling  Co.,  by 
H.  E.  Kent,  cashier,  who  are  termed  the  drawers.  In 
the  left  corner  it  reads:  "To  James  Corwith  &  Co., 
Liverpool,  Eng."  They  are  the  buyers,  or,  as  we  term 
them,  the  drawees. 

Now,  these  three  documents,  drawn  to  the  order  of 
the  exporters  (Northwestern  Consolidated  Milling 
Co. ) ,  comprise  a  commercial  bill  of  exchange. 

Upon  the  same  day  that  these  documents  were 
issued,  and  practically  before  the  flour  has  started  on 
its  long  journey,  the  exporters  offered  this  bill  of  ex- 
change for  sale.  It  was  sold  to  the  Security  Bank  of 
Minneapolis  (that  being  highest  bidder)  at  the  rate  of 
$4.84  per  pound,  who  in  turn  resold  it  to  the  Ameri- 
can Express  Co.  at  $4.84^  per  pound.  The  indorse- 
ments on  the  back  of  the  draft  read : 


FOREIGN  EXCHANGE  307 

Northwestern  Consolidated  Milling  Co.,  H.  E.  Kent,  Treas- 
urer. 

Security  Bank  of  Minnesota,  Thos.  F.  Hurley,  Cashier. 

Pay  to  the  order  of  the  National  Provincial  Bank,  Liver- 
pool. American  Express  Co.,    By  Jas.  F.  Fargo,  Treasurer. 

The  latter  indorsement  shows  the  papers  to  have 
been  sent  to  Liverpool  for  collection.  The  bank  at 
Liverpool  notified  Corwith  &  Co.  to  call  and  accept  the 
draft,  which  they  did,  by  writing  the  word  "accepted" 
and  the  date  over  their  signature. 

About  fifteen  days  afterward  the  flour  arrived  by 
slow  steamer,  and,  being  in  immediate  need  of  it,  Cor- 
with &  Co.,  in  order  to  obtain  the  bill  of  lading,  had 
to  pay  the  draft ;  the  instructions  stamped  on  same 
being:    "Surrender  documents  upon  payment  only." 

Now,  as  Corwith  &  Co.  paid  this  draft  forty-five 
days  before  it  was  due,  the  bank,  as  is  customary, 
allowed  them  the  prevailing  rate  of  discount  applicable 
to  that  class  of  bills,  which  was  2  per  cent,  (or  £1  3s. 
5d.).  The  difference,  £456  7s.  5d.,  less  cost  of  revenue 
stamps,  was  placed  to  the  credit  of  the  American  Ex- 
press Co.  by  the  bank  which  closed  the  transaction. 

Had  the  instructions  on  draft  read  "Surrender 
documents  upon  acceptance  of  draft,"'  the  bill  of  lading 
would  have  been  delivered  when  draft  was  accepted, 
thus  enabling  Corwith  &  Co.  to  obtain  goods  at  once 
and  pay  draft  sixty  days  afterward  if  they  desired. 

The  method  used  in  determining  what  this  com- 
mercial bill  was  worth  when  buying  it  here  was  based 
upon  the  following: 

1.  What  demand  exchange  upon  Liverpool  could  be 
sold  for. 

2.  The  cost  of  revenue  stamps  to  be  afiixed  when 
draft  was  accepted  abroad. 


3o8  LECTURES  ON  COMMERCE 

3.  The  interest  for  the  number  of  days  for  which 
draft  was  drawn,  plus  three  days'  grace,  at  the  rate  per 
cent,  bill  could  be  discounted. 

For  illustration : 

$4.8775      Demand  rate  on  Liverpool. 
0.00244    Cost   of   revenue   stamp    (1-20  of    i    per   cent,   of   rate 
or  I  shilling  per  100  pounds). 


$4-87506 
0.01676    Interest  63  days  2  per  cent,   (discount  rate). 


$4.85830     Parity  or  cost  per  pound  at  maturity  or  if  discounted. 
4.84125    Rate  per  pound  at  which  purchased. 


$0.01705     Profit  per  pound. 
Or  $7.78  on  £457  I2s.  lod. 

The  buying  of  foreign  commercial  bills  of  exchange 
is  the  principal  medium  of  bankers  and  foreign- 
exchange  dealers  in  placing  funds  to  their  credit  in 
banks  abroad  against  which  they  issue  checks,  drafts, 
letters  of  credit,  etc.  It  is  the  foundation  of  most  of 
our  foreign-exchange  transactions.  It  is  the  principal 
source  of  profit  in  the  business.  It  enables  manufac- 
turers to  sell  their  goods  abroad  for  cash  in  advance. 

Foreign  bills  of  exchange  vary  as  to  conditions  of 
payments  abroad.  If  conditions  of  sale  between  buyer 
and  seller  of  the  goods  were  that  goods  were  to  be  paid 
for  upon  delivery,  the  instructions  accompanying  the 
bill  would  say  "documents  for  payment"  (expressed  d. 
p.),  meaning  not  to  deliver  the  bill  of  lading  (which 
would  enable  drawee  to  get  goods)  until  draft  had 
been  paid. 

If  instructions  said  "documents  for  acceptance" 
(expressed  d.  a.),  it  would  mean  that  bill  of  lading 


FOREIGN  EXCHANGE  309 

could  be  delivered  when  draft  was  accepted,  thus  en- 
abling drawee  to  obtain  goods  at  once  and  pay  draft 
any  time  within  sixty-three  days  (if  a  sixty-day  bill). 

The  buying  of  commercial  bills  of  exchange  can  be 
safely  undertaken  only  by  those  thoroughly  familiar 
with  that  business.  It  is  practically  equivalent  to  loan- 
ing money  upon  security  you  have  not  seen.  If  the 
drawee  of  the  bill  has  unquestionable  responsibility, 
that  of  course  eliminates  the  principal  risk  of  loss ;  but 
if  great  care  is  not  exercised  in  examining  bills  pur- 
chased, a  slight  imperfection  or  error  might  cause  a 
long  delay  in  adjusting  the  error,  thereby  causing  loss 
of  interest.  If  through  a  misunderstanding  or  for 
other  cause  goods  are  not  accepted,  they  have  to  be 
sold  to  the  best  advantage  for  the  account  of  the  owner 
of  the  bill,  and  the  proceeds  of  the  sale  are  applied 
toward  payment  of  the  draft.  If  there  is  a  deficiency, 
it  is  collected  of  the  drawer  of  the  bill — the  exporter. 
The  buyers  of  commercial  bills  should  know  the 
market  value  of  the  goods  exported  and  the  financial 
standing  of  the  drawer  or  exporter ;  should  see  that  the 
bill  of  lading  is  correctly  dated,  corresponds  with  the 
shipment  made,  is  duly  signed  by  the  agent  or  proper 
official  of  the  railway  or  freight  line;  that  it  cor- 
responds with  the  insurance  certificate  in  the  various 
particulars ;  that,  if  more  than  two  copies  were  issued, 
he  has  them  all;  that  there  are  no  printed  or  stamped 
conditions  thereon  that  would  be  likely  to  render  it 
valueless  under  possible  emergencies.  If  goods  are 
perishable,  see  that  they  are  routed  by  fast  freight  and 
fast  steamers.  If  bill  of  lading  only  covers  shipment 
to  the  seaport,  as  is  sometimes  the  case  when  shipped 


310  LECTURES  ON  COMMERCE 

from  small  inland  places  where  through  bills  of  lading- 
are  unobtainable,  arrangements  must  be  made  through 
your  own  agent  to  have  same  exchanged  for  ocean  bill 
of  lading  at  seaport.  Any  error  or  incompleteness  of 
the  documents  will  cause  a  delay  in  payment  or  expense 
for  cablegrams  to  adjust  them. 

It  is  the  custom  of  large  buyers  of  foreign  com- 
mercial bills  of  exchange  to  exact  of  exporters  what  is 
termed  a  "hypothecation  certificate."  This  certificate, 
after  describing  the  nature  of  the  shipment  and  the 
documents  in  question,  states  in  effect  that  the  bill  of 
lading  is  lodged  as  collateral  security  for  the  accept- 
ance and  payment  of  the  draft ;  that  in  case  the  drawee 
declines  to  accept  the  draft,  or  it  is  not  paid  at  ma- 
turity, the  owner  of  the  bill  is  authorized  to  place  the 
property  described  in  the  hands  of  brokers  for  sale  for 
account  of  whom  it  may  concern,  and  apply  the  pro- 
ceeds toward  payment  of  the  draft  and  expenses  in- 
curred ;  and  that  in  case  of  a  deficiency  the  seller  agrees 
to  pay  amount  on  demand.  Sometimes  exporters  give 
a  general  hypothecation  certificate  to  apply  to  any  and 
all  bills  of  exchange  purchased  of  them. 

Certificates  of  insurance  on  shipments  exported  are 
usually  for  a  sum  of  from  lo  to  20  per  cent,  in  excess  of 
the  stated  value  of  the  goods.  They  should  be  care- 
fully examined  to  see  that  there  is  no  clause  which 
would  render  insurance  void  in  event  of  the  shipment 
not  going  forward  at  a  specified  period,  or  that  it 
would  expire  before  arriving  time  of  the  goods  in  case 
of  delay  or  by  reason  of  any  of  the  possible  emergencies 
likely  to  arise. 

The  buyer  of  foreign  commercial  bills  of  exchange 


FOREIGN  EXCHANGE  311 

must  be  familiar  with  the  revenue  laws  and  commercial 
customs  of  all  the  foreign  countries,  as  well  as  the  vari- 
ous rates  of  discount  upon  the  several  classes  of  paper 
as  they  change  from  day  to  day. 

You  should  always  bear  in  mind  that  a  different 
rate  for  discount  applies  to  the  different  classes  of  bills. 
For  instance,  on  documentary  bills  where  documents 
are  for  payment,  the  discount  or  rebate  rate  is  i  per 
cent,  below  the  Bank  of  England  official  minimum  dis- 
count rate.  If  drawn  on  firms  (not  bankers)  and 
documents  are  for  acceptance,  the  discount  rate  would 
be  ^  of  I  per  cent,  above  the  private  discount  rate  for 
bankers'  bills. 

If  drawn  on  bankers,  whether  documentary  or 
otherwise  (which  are  always  for  acceptance),  the  dis- 
count rate  would  be  the  private  rate  of  discount,  which 
fluctuates  according  to  demand  and  supply  of  such 
bills ;  and  in  case  of  large  transactions  it  is  customary 
for  buyers  of  such  bills  here  to  cable  their  correspond- 
ents abroad  for  a  discount  rate  to  apply  on  bills  to 
arrive  by  next  mail  or  for  a  stipulated  period  before 
buying,  in  order  that  they  may  know  exactly  at  what 
rate  the  bills  can  be  discounted  upon  their  arrival. 
Without  such  previous  arrangement  the  discount  rate 
might  change  materially  and  result  in  loss  upon  the 
transaction. 

The  Bank  of  England  official  minimum  discount 
rate  is  fixed  by  the  directors  of  the  Bank  of  England  at 
their  meetings  upon  Thursday  of  each  week,  and 
their  decision  usually  appears  in  the  financial  columns 
of  our  daily  papers  reading  thus :  ''Bank  of  England 
minimum  discount  rate  unchanged,"  or  "the  Bank  of 


312  LECTURES  ON  COMMERCE 

England  increased  (or  reduced)  its  minimum  discount 
rate  to  3  per  cent. ;"  etc. 

The  private  discount  rate  is  the  rate  at  which  pri- 
vate banks  (meaning  all  those  in  Great  Britain  other 
than  the  Bank  of  England)  will  discount  bills  of  ex- 
change for  account  of  the  owners  or  last  indorsers, 
and  this  discount  is  governed  by  the  Bank  of  England 
discount  rate,  and  also  by  the  supply  of  bills  in  the 
market  for  discount,  but,  except  under  unusual  condi- 
tions, the  private  discount  rate  will  always  be  about  ^ 
of  I  per  cent,  below  the  Bank  of  England  official  mini- 
mum discount  rate. 

What  are  known  as  "rebate  rates"  apply  only  to 
time  commercial  bills  of  exchange  drawn  on  firms 
where  documents  are  for  payment;  that  is,  where  bill 
of  lading  is  delivered  only  upon  payment  of  the  draft. 
This  rebate  is  an  allowance  made  to  the  payee  or 
drawee  from  the  face  amount  of  the  draft,  if  paid 
before  maturity,  or  before  due,  and  such  rebate  is  i 
per  cent,  below  the  Bank  of  England  official  minimum 
discount  rate. 

Theoretically  the  Bank  of  England  controls  the  dis- 
count market  in  London,  This  control  is  sought  to  be 
maintained  through  the  official  rate  of  discount  at  the 
bank,  which  is  advanced  when  its  stock  of  gold  bullion 
is  being  largely  drawn  upon  for  export  to  the  United 
States  or  European  countries.  If  conditions  prevail  to 
make  it  inadvisable  to  raise  the  bank  rate,  a  higher 
price  for  gold  will  be  charged;  or  if  it  finds  difficulty 
in  controlling  the  discount  rate,  it  will  create  a  demand 
for  discounts  by  borrowing  on  its  security,  thereby 
increasing  the  demands  for  discounts. 


FOREIGN  EXCHANGE  313 

Unlike  the  Bank  of  England,  which  undertakes  to 
control  the  stock  of  gold  by  advancing  the  discount 
rates,  the  Bank  of  France  protects  its  stock  of  gold  by 
increasing  the  price  of  gold  when  withdrawal  of  a 
larije  amount  is  threatened.  The  official  discount  rate 
of  the  Bank  of  France,  which  controls  the  market  rate, 
rarely  changes  except  in  case  of  financial  or  political 
crises. 

There  are  certain  classes  of  commercial  bills 
which,  unless  special  care  is  taken,  are  regarded 
unsafe.  In  the  case  of  cotton,  on  account  of  the 
different  grades  and  the  fact  that  there  is  so  great  a 
difference  in  the  price  of  the  different  grades,  and 
its  being  so  easy  to  substitute  one  grade  for  another, 
the  bills  against  shipments  should  be  purchased 
only  of  well-known  and  responsible  shippers  or 
indorsers. 

Grain  shipments  are  all  right,  providing  the  grain 
inspector  at  the  shipping  point  is  of  good  reputation; 
othervk'ise  he  might  inspect  as  No.  2  what  was  billed 
as  No.  I. 

Perishable  goods  are  always  more  or  less  risky,  on 
account  of  the  danger  of  delay  and  of  the  goods  spoil- 
ing. You  should  see  that  perishable  goods  are  sent 
by  fast  freight  lines  and  fast  steamers. 

Pianos,  organs,  musical  instruments,  and  such 
goods  have  imaginary  values,  and  could  rarely  be  sold 
at  the  price  at  which  billed. 

"Banker's  reimburse  bills"  is  where  drafts  are 
drawn  against  a  shipment  exported,  upon  a  banker, 
the  documents  being  for  acceptance.  When  buying 
such  bills  you  should  keep  a  record  showing  names  of 


SH  LECTURES  ON  COMMERCE 

indorsers  and  keep  close  watch  of  the  drawer  or  ship- 
per until  the  bill  is  paid.  The  shipper  should  be  respon- 
sible, and,  if  buying  a  considerable  amount  of  such  bills 
on  the  same  drawee,  you  should  ascertain  through  your 
correspondent  abroad  the  responsibility  of  the  drawee, 
and  be  sure  you  do  not  buy  more  bills  against  a  single 
drawee  than  his  ordinary  business  requirements  would 
indicate  he  needed. 

Banks  selling  commercial  bills  of  exchange  (docu- 
mentary) sometimes  stamp  them,  for  example,  "In 
case  of  need  with  the  Bank  of  Scotland,  London,"  or 
some  other  bank.  This  is  done  to  avoid  charge  of 
intermediate  banks  for  indorsing  or  protesting  drafts, 
which  charge  is  usually  very  exorbitant.  When  so 
stamped,  it  is  a  notice  to  all  holders  of  the  draft  they 
may  call  upon  the  bank  named,  if  the  draft  is  not 
promptly  accepted  or  honored,  for  relief;  therefore 
there  is  no  necessity  for  protesting.  The  bank  men- 
tioned will,  by  previous  arrangement,  always  honor 
such  drafts  and  charge  to  the  account  of  the  bank 
indorsing  such  notation  thereon. 

"Clean  bills"  of  exchange  are  those  having  no  bill 
of  lading  attached,  although  they  may  have  attached 
the  insurance  certificate  and  an  invoice  of  shipment. 
If  these  clean  bills  are  drawn  upon  firms,  they  are  sub- 
ject to  a  discount  rate  of  J4  of  i  P^r  cent,  above  the 
private  discount  rate  of  the  day;  but  if  drawn  upon 
bankers,  they  will  be  discounted  at  the  private  discount 
rate. 

Commercial  bills  of  exchange  drawn  by  exporters 
without  documents  are  generally  upon  their  own  house 
or  branch  abroad,  and  are  against  funds  which  have 


FOREIGN  EXCHANGE  315 

accumulated  to  their  credit  from  payments  for  ship- 
ments previously  made.  Exporters  before  selling  their 
own  bills  of  this  kind  usually  wait  until  the  rates  for 
exchange  here  are  high.     Such  bills  are  discountable. 

Commercial  bills  of  exchange  drawn  upon  bankers 
are  always  for  acceptance,  unless  otherwise  specified, 
and  the  discount  rate  applying  to  such  bills  is  the 
private  discount  rate  of  the  day. 

Documentary  commercial  bills  of  exchange  drawn 
upon  firms  or  banks  where  documents  are  for  payment 
cannot  be  discounted  upon  the  market,  as  in  the  case  of 
such  bills  where  documents  are  for  acceptance,  for  the 
reason  that  banks  abroad  to  which  bills  are  sent  for 
collection  will  not  undertake  to  discount  commercial 
bills  unless  they  are  what  is  called  "clean"  bills — that 
is,  those  having  no  documents  or  those  which  permit 
the  documents  to  be  delivered  when  the  draft  is  ac- 
cepted by  the  drawee. 

A  documentary  or  commercial  bill  of  exchange,  ac- 
companied-by  instructions  from  the  exporter  or  draw- 
er, to  deliver  documents  (bill  of  lading,  etc.)  only  upon 
payment  of  the  draft  by  the  importer  or  drawee,  which 
are  drawn  upon  a  firm,  are  subject  to  a  discount  rate 
of  I  per  cent,  below  the  Bank  of  England  official  mini- 
mum discount  rate.  If  the  instructions  are  to  deliver 
documents  upon  acceptance  of  the  draft,  the  same  rate 
of  discount  applies,  unless  the  drawee  is  of  very  good 
financial  standing,  in  which  case  the  bill  may  be  dis- 
counted by  the  holder  (bank)  at  %  of  i  per  cent, 
above  the  private  discount  rate  of  the  day. 

Drafts  drawn  in  the  United  States  payable  in  for- 
eign countries  are  subject  to  the  revenue  laws  of  such 


3i6  LECTURES  ON  COMMERCE 

foreign  countries,  and  the  cost  of  stamps  so  affixed 
abroad  must  be  paid  by  the  holder  of  the  bills,  who  in 
turn  generally  charges  to  the  bank  or  banker  from 
whom  they  receive  the  same  for  collection.  The 
amount  of  revenue  varies  according  to  the  country. 
The  following  shows  the  cost  on  other  than  demand 
drafts  in  the  principal  foreign  countries : 

Great  Britain :  is.  per  £  lOO  or  fraction  thereof,  or  1-20  of  i 
per  cent,  of  rate. 

Germany:  50  pfennigs  per  1,000  marks  or  fraction  thereof, 
or  1-20  of  I  per  cent,  of  rate. 

France:  50  centimes  per  1,000  francs  or  fraction  thereof, 
or  1-20  of  I  per  cent,  of  rate. 

Belgium :  50  centimes  per  1,000  francs  or  fraction  thereof, 
or  1-20  of  I  per  cent,  of  rate. 

Holland:  50  cents  per  1,000  gulden  or  fraction  thereof, 
or  1-20  of  I  per  cent,  of  rate. 

Norway,  Sweden,  and  Denmark:  50  ores  per  1,000  kroner 
or  fraction  thereof,  or  1-20  of  i  per  cent,  of  rate. 

Italy:    %  per  cent,  of  rate,  or  $1.13  per  $1,000. 

Russia:     %  per  cent,  of  rate,  or  $1.25  per  $1,000. 

Austria-Hungary:   ^  per  cent,  of  rate,  or  $1.13  per  $1,000. 

Switzerland  varies  at  different  places — some  places  have  none. 

The  cost  of  revenue  stamps  required  to  be  affixed 
to  commercial  bills  in  Great  Britain  at  the  time  of  ac- 
ceptance of  draft  is  is.  for  each  £100  or  fraction  of 
£100,  which  is  equivalent  to  ^  per  mille,  or  ^  per 
cent,  per  £1,000,  or  1-20  of  i  per  cent,  of  the  rate, 
which  latter,  expressed  decimally,  when  the  rate  is 
$4.83  per  pound,  would  be  0.00244  (or  488  divided  by 
1-20  of  I  per  cent).  Where  the  amount  of  bills  is 
small,  say  £1,000  and  under,  it  is  safe  to  deduct  ^ 
cent  per  pound  to  cover  cost  of  revenue  stamps. 

On  short  bills — five  days'  sight  or  less — only  one- 
penny  stamps  (2  cents)  are  required. 


FOREIGN  EXCHANGE  317 

Banks  abroad  are  noted  for  charging  for  every  item 
possible  in  connection  with  every  transaction  handled 
— such  items  as  postage  on  letters  sent  to  you  during 
a  certain  period,  cost  of  cablegrams,  check-books,  en- 
velopes, stationery,  and  often  a  lump  sum  for  items 
that  may  have  been  overlooked.  For  collecting  com- 
mercial bills  of  exchange  they  will  usually  charge,  in 
England,  about  1-20  of  i  per  cent.,  or  i  shilling  per 
cent.;  in  France,  1-16  per  cent.;  in  Germany,  1-20  per 
cent,  in  the  larger  places  and  from  1-16  to  %  per  cent, 
in  the  smaller  places. 

Interest  at  thirty,  sixty,  or  ninety  days,  with  three 
days'  grace  added  (as  allowed  throughout  Great  Brit- 
ain), can  easily  be  arrived  at  by  using  printed  tables 
furnished  free  by  some  of  the  leading  foreign-exchange 
bankers,  which  give  the  proper  decimal  of  a  pound  to 
deduct  for  interest  and  revenue  stamp  at  the  various 
rates.  These  printed  tables  also  give  the  same  in- 
formation for  figuring  German  and  French  bills  of  ex- 
change. 

Exchange  transactions  become  more  complicated 
when  one  country  or  place,  as  is  often  the  case,  dis- 
charges its  debts  through  another  country  by  means 
of  bills  of  exchange  drawn  upon  a  third  country  or 
place;  as,  for  instance,  a  merchant  in  Chicago  import- 
ing goods  from  China  would  pay  the  exporter  in 
China  with  a  check  upon  London,  for  the  reason  that 
such  check  would  be  more  desirable  to  the  shipper 
in  China,  since  the  demand  for  exchange  in  China  is 
greater  upon  London  than  upon  the  United  States. 

When  in  any  market  the  demand  for  exchange  on 
a  certain  country  or  place  is  greater  than  the  supply, 


3i8  LECTURES  ON  COMMERCE 

the  deficiency  is  usually  supplemented  by  bills  on  other 
countries  having  a  more  favorable  exchange  with  the 
latter. 

In  the  East  Indies  those  who  ship  to  America  usu- 
ally draw  upon  London  instead  of  America.  In  New 
Orleans,  exporters  of  cotton,  etc.,  to  Russia,  draw  upon 
London  instead  of  St.  Petersburg.  This  is  because 
England  does  more  business  with  those  countries  than 
America;  besides,  London  is  regarded  as  the  greatest 
money  center,  and  exchange  upon  that  city  is  usually 
more  favorable  and  can  be  used  to  better  advantage. 

Importers  in  Germany  will  not  accept  drafts  drawn 
against  importations  until  the  duplicate  documents 
(duplicate  draft,  bill  of  lading,  etc.)  are  presented, 
and,  in  order  to  have  the  original  draft  accepted  im- 
mediately upon  its  arrival,  banks  in  this  country  when 
forwarding  such  bills  for  acceptance  and  collection  will 
attach  to  the  original  draft  a  memorandum  agreement 
to  the  effect  that  the  duplicate  bill  of  lading  is  in  their 
possession,  and  their  correspondents  (banks)  are  re- 
quested to  guarantee  the  acceptors  (importers)  that 
the  duplicate  documents  will  be  delivered  to  them  as 
soon  as  received,  which  guarantee  also  gives  the  num- 
ber and  amount  of  draft,  the  name  of  drawer,  and  the 
signature  of  a  proper  official  of  the  bank  or  financial 
institution  forwarding  the  same. 

The  volume  of  transactions  in  French,  German,  and 
other  continental  exchange  is  quite  small  compared 
with  that  of  sterling  exchange.  The  reason  for  this  is 
that  most  banks  have  accounts  or  balances  only  at 
London,  and  where  balances  are  kept  in  other  Euro- 
pean cities  they  are  usually  small  as  compared  with 


FOREIGN  EXCHANGE  319 

their  London  account.  Therefore,  in  making  remit- 
tances to  Paris,  Berhn,  or  other  cities  on  the  continent, 
it  is  most  generahy  effected  by  transferring  the  funds 
to  those  cities  from  London,  which  can  generally  be 
handled  very  satisfactorily,  by  reason  of  most  large 
European  banks  having  branches  in  London.  It  is 
customary,  however,  for  banks,  before  transferring 
funds  from  their  London  accounts,  to  carefully  figure 
out  the  difference  in  cost  between  a  remittance  direct 
from  here  to  the  city  where  it  is  desired  to  place  the 
funds  and  the  expense  of  transferring  it  from  London. 
This  can  easily  be  determined  by  ascertaining  the  rate 
of  exchange  between  London  and  the  point  referred  to. 

A  "crossed  sterling  check"  is  one  payable  either  to 
bearer  or  order,  having  the  name  of  a  banker,  or  two 
parallel  lines  and  the  abbreviation  "&  Co.,"  written  or 
printed  across  the  face,  thus  :    "  &  Co." 

The  effect  is  to  direct  the  bank  upon  which  it  is  drawn 
to  pay  the  check  only  when  coming  to  it  through  some 
other  bank.  It  is  intended  as  an  additional  safeguard 
against  wrong  payment. 

In  most  foreign  countries  it  is  the  custom  of  bank- 
ers and  others  in  the  cashing  of  checks,  whether  drawn 
payable  to  order  or  bearer,  to  pay  to  the  person  pre- 
senting the  same,  and  under  the  laws  existing  in  these 
countries  the  paying  bank  or  banker  would  not  be 
held  liable  for  wrong  payment.  As  a  reason  for  this 
seemingly  risky  method,  it  is  claimed  that  on  account 
of  the  very  severe  penalty  imposed  for  forgery  under 
their  laws,  the  requiring  of  strict  personal  identifica- 
tion, as  exacted  by  banks  in  the  United  States,  is  found 
unnecessary. 


320  LECTURES  ON  COMMERCE 

As  an  additional  precaution  against  wrong  pay- 
ment, the  laws  of  Great  Britain  require  that  where  a 
check  is  crossed,  as  explained  above,  while  not  requir- 
ing personal  identification,  it  must  be  cashed  through 
some  bank  other  than  the  one  upon  which  it  is  drawn. 

Notwithstanding  the  requirements  under  the  laws, 
we  presume  a  reasonable  amount  of  care  is  exercised 
by  banks  to  prevent  losses  by  incorrect  payment,  and 
we  are  informed  that  in  some  countries  a  stranger  pre- 
senting a  check  drawn  to  his  order  is  required  to  make 
affidavit  that  he  is  the  person  named,  for  which  affida- 
vit the  paying  bank  exacts  a  small  fee. 


FIRE  INSURANCE. 

A.  F.  DEAN,  ASSISTANT  MANAGER,  WESTERN  DEPART- 
MENT, SPRINGFIELD  FIRE  AND  MARINE  INSURANCE 
CO. 

In  the  good  old  stagecoach  days,  before  humanity 
began  to  keep  step  to  the  ragtime  rhythm  of  steam 
and  electricity,  when  gentlemen  deemed  it  vulgar  to 
exhibit  haste,  and  youth  was  given  time  to  be  youth,  it 
was  a  wholesome  custom  with  German  students  and 
apprentices,  before  settling  down  to  the  serious  duties 
of  life,  to  spend  a  Wanderjahr  in  looking  about  their 
fatherland. 

We  live  in  a  land  and  an  age  of  accelerated  motion, 
in  which  economics  demands  from  our  young  men 
"prompt  returns"  and  the  largest  amount  of  usufruct 
from  the  smallest  investment  in  preliminary  training. 
The  American  alumnus  seldom  has  a  Wanderjahr. 
He  is  lassoed  fresh  from  the  campus,  bridled,  saddled, 
and  put  to  work  under  the  merciless  spur  of  necessity. 
It  must  be  admitted  that  a  good  constitution  and  other 
inherited  traits  enable  him  to  do  creditable  work,  but 
he  might  do  better  work  after  a  year  of  observation 
and  meditation,  and  possibly  escape  the  lifelong  rasping 
of  an  uncongenial  occupation  had  he  the  opportunity 
to  peep  into  our  busy  hives  of  modern  activities  long 
enough  to  get  some  definite  idea  of  their  relations, 
scope,  and  purpose  before  choosing  his  vocation. 

But  it  is  useless  to  speculate  over  the  impossible. 
The  trail  of  the  electric  wire  and  railway  track  is 

321 


322  LECTURES  ON  COMMERCE 

over  us  all,  and  the  Wandcrjahr,  like  many  things 
good  and  bad,  has  been  relegated  to  the  limbo  of  the 
past.  In  its  lieu  your  provident  Alma  Mater  has 
arranged  to  bring  before  you  through  a  series  of 
lectures  a  portrayal  of  the  major  industries  of  your 
fatherland  which  you  cannot  spend  a  Wandcrjahr  in 
seeing — a  portrayal  of  things  grown  so  intricate  in 
their  modern  expansion  that  the  mere  seeing  without 
explanation  w^ould  not  give  you  understanding. 

It  is  my  duty  today  to  tell  you  about  fire  insurance : 
why  it  is,  what  it  is,  what  it  does,  and  how  it  does  it. 

An  adjuster  of  fire  losses  once  told  an  inquisitive 
stranger,  who  was  anxious  to  know  his  business,  that 
he  was  engaged  in  buying  ashes.  While  this  does 
not  define  what  Kant  would  call  "the  thing  itself" 
of  fire  insurance,  it  does,  in  a  way,  define  its  immediate 
manifestation,  for  fire  insurance,  as  the  public  under- 
stands it,  is  a  world-wide  dealer  in  ashes;  and  one  of 
the  most  extensive  transactions  on  record  was  negoti- 
ated in  this  city  when  it  bought  an  ash  heap  bounded 
on  the  north  by  Lincoln  Park  and  on  the  south  by 
Mrs.  O'Leary's  barn.  If  you  ask,  "What  does  fire 
insurance  do  with  the  ashes  it  buys?"  I  can  only  reply, 
"Nothing."  It  neither  exports  nor  utilizes  them. 
It  simply  leaves  them,  with  the  confident  assurance 
that  the  golden  seed  it  has  distributed  will  soon  cause 
the  ash  heap  to  put  forth  a  luxuriant  crop  of  homes, 
factories,  schools,  churches,  and  emporiums  of  trade 
sheltering  all  the  myriad  fabrics  which  enter  into 
human  needs.  In  all  this,  however,  no  magic  is  per- 
formed. Fire  insurance  does  not  create  something 
out  of  nothing;    it  does  not  cause  a  barren  ash  heap 


FIRE  INSURANCE 


323 


to  blossom  forth  in  imposing  facades  and  burnished 
domes.  It  does  not  even  conserve  or  save,  for  its 
golden  seed  which  sprout  into  the  varied  creations  of 
human  thought  and  toil  must  soon  or  late  be  garnered 
from  the  four  quarters  of  the  land.  As  the  air  is 
ceaselessly  gathering  up  minute  particles  of  water  from 
the  earth's  surface,  to  hold  in  trust  until  condensation 
forces  it  to  re-deliver  its  aqueous  hoard,  so  fire  insur- 
ance is  ceaselessly  gathering  from  city,  village,  hamlet, 
and  farm  its  tribute,  atom  by  atom,  to  hold  in  trust 
until  conflagration  shall  compel  it  to  refund  its  hoarded 
indemnity.  There  is  this  important  difference,  how- 
ever, in  the  analogy :  nature  reinstates ;  fire  insurance 
does  not.  Matter  and  energ}^  are  constant  quantities. 
There  is  no  loss  in  the  transformation  of  water  into 
cloud  and  cloud  into  water,  but  in  fire  insurance  some- 
thing disappears  which  can  never  be  replaced.  It  is 
true  that  when  a  building  or  a  city  is  destroyed,  fire 
insurance  makes  it  possible  to  create  another  building 
or  city  in  its  place;  but  the  fact  remains  that  some- 
thing has  disappeared,  and  the  world  is  permanently 
impoverished  by  the  event — as  much  impoverished  as 
if  fire  insurance  did  not  exist;  but  the  loss  escapes  the 
attention  of  society  at  large  because  the  material  thing 
that  has  vanished  in  smoke  and  ashes  is  replaced  by 
tribute  gathered  from  the  four  corners  of  the  land. 
The  human  effort  that  has  been  expended  in  trans- 
forming matter  from  its  crude  forms  into  things  beau- 
tiful and  useful  is  the  immaterial  thing  that  cannot  be 
reinstated.  The  thing  that  has  vanished  forever  is 
value.  This  insurance  cannot  replace.  It  simply 
gathers    up    comminuted    values    as    the    air    absorbs 


324  LECTURES  ON  COMMERCE 

moisture,  and  releases  its  holdings  where  and  when  a 
value-vacuum  has  been  caused  by  combustion.  But 
again,  unlike  the  rain  which  descends  alike  on  the 
righteous  and  the  unrighteous,  fire  insurance  discrimi- 
nates. It  does  not  yield  up  its  stored  values  except 
to  him  who  has  contributed  for  the  service,  and  then 
only  by  an  established  ratio,  which  has  to  do  with  the 
relative  liability  of  his  property  to  fire,  and  the  rela- 
tive amount  of  value  in  this  property  for  which  he 
has  purchased  '*a  call"  for  a  commensurate  shower 
of  indemnity.  Unlike  the  atmosphere,  which  blindly 
desiccates  one  region  to  deluge  another,  fire  insurance 
must  exact  value  received  and  measure  out  its 
indemnity  wuth  the  same  scrupulous  exactitude  that 
the  morning  milkman  exercises  when  he  fills  the  quart 
cups  for  which  he  has  sold  milk  tickets  in  advance. 

From  what  has  been  said  it  will  be  seen  that, 
strictly  speaking,  fire  insurance  belongs  neither  to  the 
creative  nor  to  the  economic  industries.  It  simply 
gathers  dispersed  values  and  transports  them  to  the 
place  where  a  vacuum  has  been  created  by  fire,  for 
the  use  of  the  person  who  has  paid  for  this  service, 
just  as  the  railways,  with  which  fire  insurance  has 
many  problems  in  common,  transport  property  from 
areas  of  low  value  to  areas  of  high  value  for  people 
who  have  paid  the  freight.  Again,  in  gathering  dis- 
persed values  from  the  many  for  a  common  purpose,  it 
performs  a  function  similar  to  that  of  the  tax-gatherer. 
Indeed,  in  its  ultimate  analysis,  the  broadest  definition 
of  all  kinds  of  insurance — life,  fire,  accident,  marine, 
and  what  not  (for  it  is  possible  in  these  days  to  buy 
insurance  against  the  happening  of  almost  any  con- 


FIRE  INSURANCE  325 

ceivable  event) — would  be  to  call  it  a  tax  to  make 
good  the  value-vacuums  caused  by  some  specific  change 
from  existing  conditions  in  person  or  property. 
Along  with  this  most  general  definition  we  find  the 
collateral  fact  that  contracts  of  insurance  could  not 
be  entered  into  with  safety  by  the  obligor,  were  there 
not  some  reasonably  well  understood  laws  of  change 
which  establish  what  are  known  as  averages;  for  it 
is  upon  the  uniformity  of  these  laws  that  the  possi- 
bility of  insurance  of  all  kinds  rests.  If  chance 
existed  in  sum-totals  to  the  same  extent  that  it  exists 
in  the  individual  instances  which  make  up  these  sum- 
totals,  the  obligor,  or  insuring  company,  would 
occupy  the  same  relation  to  chance  as  the  obligee  or 
insured  person;  but  it  does  not  so  exist,  and  it  is  this 
fact  which  enables  the  insuring  company  (with  com- 
parative safety  to  itself)  to  assume  the  liability  for 
disastrous  change  which  constitutes  pure  chance  with 
the  obligee.  In  proportion  as  civilization  has  expanded 
its  records  over  time  and  space,  it  has  become  more 
and  more  certain  that  the  chance  which  is  all  in  all 
in  the  individual  instance  fades  out  into  averages  as 
we  approach  the  totality  of  things,  until  in  a  theoreti- 
cal totality  it  becomes  absolute  certainty.  The  prop- 
erty owner  over  whom  the  catastrophe  of  individual 
instance  impends  buys  exemption  from  a  company, 
with  which  his  chance  is  distributed  over  the  number 
of  similar  individual  instances  which  the  company  has 
assumed.  It  is  true  that  no  company,  however  large, 
has  ever  been  able  to  distribute  its  chance  among 
enough  individual  instances  to  reach  the  goal  of  abso- 
lute   certainty    found    in    the    theoretical    totality    of 


326  LECTURES  ON  COMMERCE 

things,  but  every  company  that  has  gathered  in  enough 
individual  instances  or  risks  to  constitute  what  is 
known  as  a  distributed  business  has  reduced  its  chance 
from  the  dangerous  explosiveness  of  the  individual 
instance  into  wave-like  fluctuations  which  it  can 
measure  and  change  its  rates  to  fit. 

But  this  is  an  age  of  comity;  the  individual  com- 
pany is  not  limited  to  its  own  experience.  Each  year 
the  statistical  experience  of  all  companies  in  the  United 
States  is  published  for  the  benefit  of  whom  it  may 
concern.  The  annual  publication  of  these  figures  is 
looked  forward  to  by  underwriters  with  intense  inter- 
est, as  the  nearest  possible  approximation  to  the  cer- 
tainty found  in  the  sum-total  of  things.  But  still  we 
do  not  find  the  invariable  average  of  certainty  in  single 
years,  for  averages  have  to  do  with  time  as  well  as 
space,  and  the  figures  of  all  companies  for  ten-year 
periods  afford  a  still  closer  approximation  to  the 
immutability  of  real  averages — so  close,  indeed,  that 
the  underwriting  income  of  all  companies,  when  com- 
pared with  their  outgo  for  any  ten-year  period  since 
combined  records  have  been  kept,  exhibits  a  difYerence 
of  perhaps  not  more  than  i  or  2  per  cent,  in  any  one 
decade.  These  facts  show  that,  whatsoever  methods 
individual  companies  may  adopt  in  the  transaction  of 
their  business — and  it  must  be  confessed  that  some 
of  them  resort  to  methods  largely  speculative — the 
ideal  conduct  of  the  business,  known  in  trade  parlance 
as  "sound  underwriting,"  is  the  farthest  possible 
remove  from  chance,  and  that  whatever  faults  of 
omission  and  commission  fire-insurance  companies 
may  be  guilty  of  individually,  fire  insurance  itself  is 


FIRE  INSURANCE  327 

not  a  gambling  business.  On  the  contrary,  its  animus 
or  intent  is  the  very  antithesis  of  gambling.  In 
gambling  we  seek  the  danger  and  excitement  of 
uncertainty;  in  insurance  we  seek  the  repose  and 
safety  of  certainty.  This  ethical  difference  between 
insurance  and  gambling  is  today  beginning  to  be 
pretty  well  understood  by  intelligent  people,  although 
it  has  not  been  many  years  since  the  pulpits  thundered 
against  insurance  as  an  insidious  form  of  immorality; 
and  even  now  it  is  difficult  to  find  a  jury  that  does  not 
look  upon  it  as  a  gambling  business  in  which  the 
insuring  company  has  all  the  advantages  of  a  dealer 
in  the  game.  On  the  other  hand,  it  may  be  confessed 
that  fire  insurance  had  its  birth  in  the  spirit  of  gam- 
bling; else  it  would  not  have  been  born.  All  forms 
of  activity  which  plunge  into  the  unknown  or  untried 
are  in  one  sense  gambling,  but  we  must  admit  that 
they  constitute  that  beneficent  form  of  gambling  known 
as  enterprise,  which  is  the  leaven  of  all  human  progress. 
Every  new  company,  before  it  gets  enough  risks  upon 
its  books  to  establish  at  least  an  approximate  average, 
must  pass  through  a  period  of  chance;  it  must  take  a 
gambler's  risk;  and  this  was  more  notable  in  the  early 
days  of  insurance,  when  statistics  were  not,  and  the 
laws  of  average  but  dimly  discerned.  Insurance  today 
perhaps  more  nearly  than  any  form  of  modern  activity 
fulfils  in  a  strictly  business  way  the  divine  injunction, 
"Bear  ye  one  another's  burdens;"  but  there  is  nothing 
to  gain  by  denying  that  it  owes  its  origin  to  motives 
far  from  divine,  in  that  they  were  humanly  selfish  and 
to  the  last  degree  venturesome. 

The   earliest  known    form   of   insurance   seems   to 


328  LECTURES  ON  COMMERCE 

have  been  marine.  We  have  no  records  of  fire 
insurance  until  after  the  great  London  fire  in  1666, 
and  as  a  vague  and  ill-defined  business — which,  per- 
haps, partook  more  of  the  nature  of  gambling  than  of 
business  ( for  the  contracts  of  that  day  were  not  limited 
to  simple  indemnity  and  did  not  require  an  insurable 
interest  in  the  property  insured) — it  languished  until 
the  age  of  steam.  The  invention  of  the  steam  engine 
brought  about  an  early  and  enormous  concentration 
of  values  in  vast  manufacturing  and  commercial  estab- 
lishments, with  a  corresponding  growth  of  cities  and 
expansion  of  transportation  and  banking  facilities. 
Then,  and  not  until  then,  did  the  full  significance  of  fire 
insurance  begin  to  make  itself  manifest.  The  triune 
world  of  manufactures,  trade,  and  transportation  was 
swathed  in  an  atmosphere  of  credit.  Manufacturers 
built  their  plants  and  bought  their  supplies  on  credit 
and  sold  their  output  to  merchants  "on  time,"  who, 
in  turn,  sold  to  farmers,  who  were  expected  to  pay 
when  they  sold  their  crops.  Railways  were  financed 
and  built  upon  a  system  of  bonded  indebtedness; 
banks  loaned  their  depositors'  money;  thus  completing 
a  cycle  of  credit  in  which  everybody  was  concerned. 
For  the  first  time  in  history,  commerce  began  to  assume 
a  resemblance  to  the  human  body,  in  which  an  injury 
to  one  member  is  an  injury  to  all;  but  it  was  an 
unstable  compound — nitrogenous  and  liable  to  explo- 
sive disintegration.  The  business  world  was  con- 
fronted with  the  momentous  fact  that  a  fire,  say,  in  a 
great  mercantile  establishment  would  cause  the  mer- 
chant to  default  to  the  manufacturer;  the  manufac- 
turer to  the  bank;  and  the  bank  to  its  depositors,  or, 


FIRE  INSURANCE  329 

at  best,  would  compel  it  to  throw  its  securities,  com- 
posed of  the  obligations  of  others,  on  the  market,  and 
thus  precipitate  a  general  toppling  of  values,  which 
might  bring  everything  and  everybody  down  in 
common  ruin.  If  all  this  might  happen  from  the 
burning  of  a  single  value-unit,  the  possibilities  resulting 
from  the  burning  of  an  entire  city  were  too  direful  to 
contemplate.  The  mutual  confidence  and  helpfulness 
which  are  the  essentials  of  modern  civilization  could 
not  exist  in  the  face  of  impending  disaster  which  might 
ingulf  everybody.  Common  prudence  began  to  sug- 
gest to  the  banker,  the  manufacturer,  and  the  merchant 
to  require,  as  a  condition  precedent  to  credit,  that 
insurance  be  maintained ;  and  then  fire  insurance  began 
to  assume  its  real  function  and  to  be  recognized  as  an 
accredited  member  of  the  sisterhood  of  activities 
which  constitute  modern  commerce — a  member  charged 
with  the  duty  of  changing  the  truculent  chance  of 
individual  instance  into  the  benign  certainty  of 
averages.  Today  the  destruction  by  fire  of  a  great 
manufacturing  establishment  or  a  mammoth  entrepot 
of  trade  is  a  matter  of  daily  occurrence,  while  every 
few  months  a  goodly  city  is  swept  away  by  conflagra- 
tion; but  fire  insurance  promptly  appears  upon  the 
scene  and  sows  its  golden  seed  over  the  ash  heap,  and 
in  a  few  months  a  new  city  springs  up  to  replace  the 
old.  Meanwhile  the  great  world  of  human  activities 
moves  steadily  on  its  course,  unperturbed. 

Fire  insurance  is  the  child  of  advanced  civilization. 
When  the  chief  avocation  of  man  was  found  in 
furbishing  his  armor  and  practicing  in  the  tilt-yard,  it 
lay  in  the  womb  of  the  distant  future.     When  men 


330  LECTURES  ON  COMMERCE 

stopped  killing  each  other  as  the  only  honorable  voca- 
tion and  began  to  extend  a  friendly  hand  to  each  other 
in  scaling  the  heights  of  material  prosperity,  fire  insur- 
ance was  born  of  the  need  of  mutual  helpfulness  upon 
a  strictly  business  basis.  Today,  in  every  nook  and 
corner  of  the  civilized  world,  the  farmhouse,  barn, 
granary,  live  stock,  and  crop,  the  mechanic's  modest 
home,  the  massed  values  of  our  cities,  the  great  indus- 
trial plants,  the  railway  depots,  shops,  rolling-stock, 
and  goods  in  transit,  are  one  and  all  held  in  the  hollow 
of  the  hand  of  fire  insurance,  and  humanity  goes  tran- 
quilly about  its  business  with  sleep  and  digestion 
undisturbed  by  the  alarm  of  the  fire  bell,  with  serene 
faith  in  its  pledge,  "We  hold  thee  safe."  Surely  this 
is  an  important  and  useful  function,  a  function  entitled 
to  the  respect  and  protection  of  the  body  politic. 

At  the  present  time  thousands  of  corporations,  big 
and  little,  are  transacting  the  business  of  fire  insurance 
in  the  United  States,  and  annually  several  thousand 
million  dollars  of  values  come  under  their  protection. 
The  personnel  of  the  industry  aggregates  perhaps  a 
quarter  of  a  million  persons,  at  a  moderate  estimate. 

It  is  proper  to  bear  in  mind  that,  so  far  as  the 
buyer  is  concerned,  all  fire  insurance  is  based  upon 
credit.  The  policy  holder  pays  his  money  for  a  con- 
tract that  may  or  may  not  require  a  specific  perform- 
ance on  the  part  of  the  company  at  an  indefinite  time 
— possibly  several  years — in  the  future.  In  the  mean- 
time he  must  confide  in  the  honor  and  stability  of  the 
company.  This  would  seem  to  make  it  to  the  interest 
of  the  purchaser  of  fire  indemnity  to  look  into  the 
solvency  and  character  of  the  institution  he  trusts  with 


FIRE  INSURANCE  331 

the  same  care  which  he  would  exercise  in  confiding 
the  same  amount  of  value  to  the  care  of  a  bank,  to 
remain  on  deposit  an  indefinite  number  of  years,  in 
which  event  common  prudence  would  suggest  that  he 
satisfy  himself,  not  only  that  the  bank  is  solvent,  but 
that  it  is  likely  to  remain  so.  His  only  guarantee 
from  the  fire-insurance  company  is  the  hard  cash  which 
constitutes  its  assets,  as  revealed  by  its  sworn  financial 
statements  and  its  known  character  for  sound  and  safe 
dealing. 

As  the  only  function  of  capital  in  fire  insurance  is 
to  stand  sponser  for  the  performance  of  a  contract  to 
be  performed  at  some  indefinite  time  in  the  future,  it 
follows  that  the  business  may  be  transacted  entirely 
without  assets.  This  is  shown  by  the  existence  of 
innumerable,  and  more  or  less  ephemeral,  "Mutuals" 
and  "Lloyds."  I  will  not  attempt  to  describe  these 
institutions,  however,  for  they  play  a  minor  role  in  the 
business,  and  are  not  likely  to  play  a  more  important 
role  in  the  future.  It  needs  no  argument  to  show  that 
the  vast  majority  of  the  property  values  of  the  world 
are  and  must  be  protected  by  the  contracts  of  corpora- 
tions, with  adequate  cash  capital,  and  a  liberal  surplus 
safely  invested  in  standard  securities  that  are  instantly 
convertible  into  cash.  These  cash  assets  are  as  neces- 
sary  to  the  safe  conduct  of  the  business  as  a  central 
reservoir  is  to  the  control  and  equitable  distribution  of 
a  municipal  gas  supply. 

It  would  be  difficult  to  find  any  class  of  corpora- 
tions in  the  world  whose  assets  are  more  carefully 
invested  or  more  readily  convertible  into  cash  than 
those  of  the  standard  companies  on  whose  shoulders 


332  LECTURES  ON  COMMERCE 

rests   the    responsibility   of   making   good   the   value- 
vacuums  caused  by  fire. 

The  general  agency  business  of  the  country  is 
transacted  by  about  one  hundred  and  seventy-five 
companies,  native  and  foreign,  with  individual  assets 
ranging  from  a  few  hundred  thousand  to  twenty 
million  dollars  each.  These  companies  all  conform 
to  the  insurance  laws  of  the  several  states  in  which 
they  transact  business,  and  the  laws  of  each  state  vary 
from  those  of  every  other  state.  Each  company  must 
make  a  deposit  with  the  state,  if  so  required  by  law, 
and  make  annual  reports  of  its  aggregate  business  as 
well  as  of  the  business  done  in  the  state,  accompanied 
by  a  statement  of  assets  and  liabilities,  and  when 
required  submit  to  an  examination  by  the  state  author- 
ities. It  must  pay  for  a  certificate  of  authority  for 
itself  and  for  each  of  its  agents,  and  in  addition  pay 
a  tax  on  the  amount  of  its  business  in  the  state,  the 
entire  taxes  of  the  companies  in  all  states  averaging 
about  3  per  cent,  of  the  premiums  received,  which  is 
considerably  more  than  the  net  underwriting  profits  of 
the  industry  itself. 

Having  complied  with  the  numerous  and  onerous 
exactions  of  the  states,  and  appointed  an  agent  in  the 
towns  where  it  transacts  business,  the  company  must 
equip  each  agent  with  an  outfit  of  supplies,  consisting 
of  stationery,  blank  printed  forms,  policies,  a  register, 
in  which  to  keep  a  record  of  all  policies  issued,  a  map 
showing  every  building  in  the  town,  including  its 
structure,  exposure,  and  occupancies,  and  a  printed 
tariff  giving  the  rate  of  each  building  and  contents. 
The  company  must  also  purchase  a  copy  of  the  map 


FIRE  INSURANCE  333 

and  tariff  for  use  in  its  own  office.  These  maps  and 
tariffs  must  be  frequently  corrected  to  keep  up  with 
the  constant  changes  that  occur  in  structure,  occu- 
pancy, and  exposure,  in  order  that  they  may  furnish 
rehable  information  as  to  the' present  circumstances  of 
each  risk.  Without  this  correction  they  would  soon 
become  obsolete  and  misleading.  The  extent  of  the 
labor  of  constructing  these  maps  and  tariffs  may  be 
surmised  from  the  fact  that  the  map  of  this  city  alone, 
consisting  of  sixteen  large  volumes,  costs  about  fifteen 
hundred  dollars  to  each  company.  The  Chicago  tariff 
alone,  which  is  constructed  by  the  so-called  card  sys- 
tem, fills  a  cabinet  about  the  size  of  an  ordinary  bureau, 
and  to  keep  this  corrected  up  to  date  costs  each  com- 
pany about  one  thousand  dollars  per  annum.  As  the 
making  and  correcting  of  maps  and  tariffs  require  a 
separate  examination  from  cellar  to  garret  of  each 
building,  it  will  readily  be  seen  that  no  single  company 
could  afford  the  expense.  The  work  of  rating  and 
mapping  is  necessarily  co-operative — the  expense  must 
in  one  way  or  another  be  shared  by  all  companies. 

When  a  company  has  complied  with  all  these  pre- 
liminaries and  is  equipped  with  an  agency  plant,  each 
agent  is  expected  to  go  out  and  solicit  business,  and, 
when  secured,  to  issue  policies  and  from  time  to  time 
make  such  indorsements  as  may  be  necessary,  keeping 
a  copy  of  the  written  portion  of  each  policy  and  in- 
dorsement in  his  register,  and  forwarding  another 
copy  on  blanks,  known  as  "daily  reports"  and  "indorse- 
ment reports,"  to  the  company.  For  this  work  agents 
are  paid  by  a  commission  on  the  premiums  they  col- 
lect. 


334  LECTURES  ON  COMMERCE 

The  income  and  outgo  of  every  stock  company 
naturally  divide  themselves  under  the  following  heads : 

1.  Income:  (a)  earnings  of  assets;  (b)  fire  pre- 
miums. 

2.  Outgo:     (a)  fire  losses;    (b)  expenses. 

The  first  item  of  income,  i.  e.,  "earnings  of  assets," 
is  to  be  considered  as  a  thing  entirely  separate  and 
apart  from  the  transaction  of  fire  insurance. 

Each  stock  company  is  required  by  law  to  make 
good  any  impairment  in  its  capital  without  delay,  hence 
it  is  an  advantage  to  have  a  liberal  margin  of  surplus 
over  its  capital  and  all  outstanding  liabilities.  This  mar- 
gin (known  as  net  surplus),  with  most  of  the  leading 
companies,  is  as  large  as  the  capital,  and  with  many 
companies  three  or  four  times  as  large.  In  addition  to 
capital  and  surplus,  each  company  collects  its  premiums 
upon  the  issuance  of  policies,  and  as  it  does  not  have 
to  pay  losses  until  they  occur,  it  holds  an  additional 
fund  in  trust  known  as  "unearned  premiums,"  amount- 
ing to  an  average  of,  say,  60  per  cent,  of  its  annual 
premiums.  The  company  has  the  usufruct  of  this  fund 
as  well  as  of  its  capital  and  surplus,  and  as  its  assets  are 
kept,  as  closely  as  possible,  invested  in  interest-bearing 
securities,  its  income  from  the  earnings  of  its  assets  is, 
as  a  rule,  much  greater  and  more  certain  than  its  net 
underwriting  income,  though  this  is  of  course  depend- 
ent upon  the  relation  of  its  net  surplus  and  annual 
premiums  to  its  capital.  As  an  illustration  let  us  take 
the  figures  of  a  prominent  American  company: 
Capital  -----  $1,000,000 
Net  surplus         -        -        _  4,500,000 

Unearned  premiums      -        -      2,000,000 

Total    -        -        -       -        $7,500,000 


FIRE  INSURANCE  335 

The  interest  on  the  total  at,  say,  4  per  cent,  is 
$300,000,  which  would  pay  an  annual  dividend  of 
30  per  cent,  on  the  capital  of  $1,000,000,  even  if  it  had 
not  made  a  penny  in  its  underwriting. 

When  the  total  assets  of  a  company  are  large  com- 
pared with  its  capital  stock,  a  moderate  change  in  the 
stock  market  makes  a  large  difference  in  its  assets 
when  this  difference  is  compared  with  its  capital  stock. 
In  the  instance  just  cited,  a  change  of  10  per  cent, 
would  make  a  difference  almost  equal  to  the  entire 
capital  stock  of  the  company.  These  facts  demonstrate 
that  the  financial  income  and  the  underwriting  income 
of  a  company  are  entirely  independent  of  each  other. 
A  company's  annual  statement  may  show  a  handsome 
gain  when  it  has  lost  heavily  on  underwriting,  or  it 
may  show  a  large  depreciation  of  assets  when  it  has 
actually  made  money  on  its  underwriting.  If  the 
stockholders  should  sell  their  stock  and  individually 
invest  the  proceeds  elsewhere,  the  results  would  be 
precisely  the  same,  if  invested  with  the  same  judgment. 
It  is  important  to  bear  this  fact  in  mind,  because  the 
companies  are  often  blamed  for  charging  exorbitant 
rates,  while  making  inordinate  profits;  when  if  their 
statements  were  analyzed,  these  profits  would  be  found 
to  be  derived  entirely  from  a  sharp  advance  in  market 
values,  added  to  the  earning  capacity  of  their  own 
assets. 

Every  piece  of  insurable  property  liable  to  be  de- 
stroyed by  one  fire,  as,  say,  a  building  and  contents, 
is  known  as  a  "risk."  It  is  possible  for  a  company  to 
cover  a  number  of  risks  under  one  policy,  as  is  often 
done.     The  amount  a  company  is  willing  to  insure  on 


336  LECTURES  ON  COMMERCE 

a  given  risk  is  known  as  its  "line."  A  given  risk  may 
embody  value  to  the  extent  of  many  hundred  thousand 
dollars  on  which  no  conservative  company  would  as- 
sume a  line  of  over  $5,000.  This  makes  it  necessary 
for  agents  who  control  such  risks  to  represent  a  number 
of  companies  in  order  to  accommodate  their  patrons, 
and  it  is  not  uncommon  for  an  agent  to  represent  as 
many  as  twenty  companies. 

Every  well-managed  company  furnishes  its  agents 
with  a  list  of  the  classes  of  property  it  does  not  insure, 
which  is  known  as  its  "prohibited  list."  It  also  fur- 
nishes them  with  a  list  of  the  lines  it  will  carry  on  the 
business  it  writes,  which  is  known  as  its  "list  of  maxima 
lines."  As  it  is  a  vital  necessity  for  each  company  to 
have  its  liabilities  distributed,  it  is  usual  for  companies 
in  addition  to  their  line  list  to  instruct  their  agents  as 
to  the  total  amount  they  will  carry  in  any  one  block, 
this  amount  being  known  as  their  block  limit. 

As  the  necessities  of  agents  often  compel  them  to 
represent  many  companies,  and  as  their  compensation 
consists  of  commissions,  it  follows  that  the  company 
paying  the  largest  commission  is  likely  to  receive  the 
best  treatment  from  agents.  Efforts  in  the  past  to 
induce  all  companies  to  agree  upon  some  maximum 
compensation  to  agents  have  invariably  failed.  About 
40  per  cent,  of  the  companies  transacting  a  general 
agency  business  are  a  law  unto  themselves  as  to  rates 
and  commissions. 

I  do  not  propose  to  weary  you  with  a  prolonged 
description  of  the  modus  operandi  of  fire  insurance, 
because,  perhaps,  no  two  companies  have  the  same 
modus,  and  a  comparison  of  their  individual  methods 


FIRE  INSURANCE  337 

would  be  as  tedious  and  unprofitable  as  a  comparison 
of  the  relative  merits  of  the  same  number  of  house- 
keepers. Every  successful  company  has  its  special, 
often  indefinable,  trade  secrets,  which  enable  it  to 
handle  certain  classes  and  circumstances  more  skilfully 
than  many  of  its  competitors,  and  thus  year  after  year 
to  gather  figs  where  others  gather  thistles. 

When  an  agent  secures  a  risk  and  has  determined 
which  of  his  companies  he  will  place  it  with,  he  writes 
out  a  policy,  and  makes  two  copies  of  the  written  part 
of  this  policy,  one  in  his  register  and  one  on  a  blank 
daily  report.  The  latter  he  mails  to  the  company,  and 
its  contents  constitute  the  immediate  information  on 
which  the  company  determines  the  acceptability  of  the 
risk.  In  addition  to  a  copy  of  the  written  portion  of  the 
policy,  this  daily  report  contains  certain  queries  which 
are  expected  to  be  answered  by  the  agent — queries  as 
to  the  amount  of  total  insurance,  value  of  the  property, 
title,  incumbrances,  etc.,  including  location  of  risk  in 
map,  and  amount  of  other  insurance  carried  by  the 
company  in  the  same  block.  On  receipt  of  this  report 
it  is  entered  in  the  company's  register,  mapped,  com- 
pared with  commercial  and  fire  records  and  tariff,  and 
passed  to  an  examiner,  who  carefully  looks  into  all 
the  circumstances  of  the  risk,  as  shown  by  the  daily 
report  and  other  data.  If  the  examination  is  satis- 
factory, the  document  is  marked  approved  and  passed 
to  the  files.  If  the  information  reveals  unsatisfactory 
conditions,  the  risk  is  declined,  or  further  information 
is  elicited  by  correspondence,  and  in  some  cases  the 
matter  is  referred  to  a  special  agent  for  personal  in- 
vestigation.     When   a   daily   report   has  been   finally 


338  LECTURES  ON  COMMERCE 

approved  and  filed  away,  it  is  not  again  heard  from 
during  the  hfe  of  the  poHcy,  unless  there  is  some 
change  in  the  ownership  or  circumstances,  which  re- 
quires an  indorsement  or  investigation,  or  unless  the 
property  is  damaged  or  destroyed  by  fire.  When  a 
change  occurs,  the  agent  is  expected  to  indorse  the 
policy,  collect  premiums  for  any  increase,  or  refund 
premiums  for  any  decrease  in  hazard,  and  report  the 
facts  on  a  blank  indorsement  report.  Changes  are  con- 
stantly occurring  which  necessitate  indorsements,  and 
an  indorsement  frequently  entails  more  labor  for  agent 
and  company  than  the  issue  of  the  original  policy. 

While  every  company  employs  traveling  representa- 
tives to  look  after  changes  of  agency,  collection  of 
balances,  adjustment  of  losses,  inspection  of  risks,  etc., 
the  numerous  duties  and  interruptions  of  these  em- 
ployees make  it  impossible  for  them  to  inspect  person- 
ally all  risks,  and  with  the  few  companies  which  em- 
ploy a  force  large  enough  to  attempt  this  an  inspection 
may  be  so  delayed  as  to  be  of  no  value  in  the  accept- 
ance of  business.  Hence,  in  the  nature  of  things,  the 
information  upon  which  the  great  part  of  the  business 
of  the  country  is  written  is  furnished  by  agents  and 
policy  holders. 

Taking  it  all  in  all,  the  care  exercised  by  any  well- 
managed  company  in  approving  a  risk  is  as  great  as 
that  taken  by  a  bank  in  passing  on  a  loan,  though  the 
amount  of  detail  in  preliminary  investigation  is  vastly 
greater  with  the  risk  than  with  the  loan.  The  neces- 
sity for  this  care  is  even  more  urgent  with  the  risk 
than  with  the  loan,  for  the  facts  are  more  numerous, 
obscure,    and   inaccessible,    and   the   liability   to   loss 


FIRE  INSURANCE  '     339 

through  oversight,  carelessness,  or  error  of  judgment 
just  as  great. 

When  a  loss  occurs  under  a  company's  policy,  it 
becomes  its  duty  to  send  a  representative  to  adjust  the 
loss  with  the  assured  under  the  terms  of  the  contract. 
Then,  as  a  rule,  the  assured  reads  for  the  first  time 
the  contract  which  he  has  been  depending  upon  as  his 
bulwark  against  disaster.  Before  a  man  enters  into 
any  other  contract  of  equal  importance,  he  is  apt  to 
read  it  over  carefullv  several  times;  to  criticise  the 
exact  shade  of  meaning  of  every  phrase,  word,  and 
punctuation  point;  and  not  infrequently  he  employs 
the  best  legal  talent  to  see  that  the  contract  protects 
his  interests  at  every  point.  For  some  inscrutable 
reason  people  look  differently  upon  an  insurance  policy, 
as  they  habitually  chuck  it  into  a  pigeon  hole,  unread, 
pending  a  fire.  When  a  loss  occurs  the  policy  holder 
as  a  rule  begins  for  the  first  time  to  read  his  policy 
and  file  his  objections.  In  fine,  most  people  insist 
upon  making  their  fire-insurance  contracts  after  the 
event  instead  of  before,  as  they  make  other  contracts. 

The  insurance  policy  has  long  been  subjected  to 
unfriendly  criticism  from  courts,  legislatures,  news- 
papers, and  the  people,  as  an  e.v  parte  contract  formu- 
lated by  the  companies — a  contract  whose  real  mean- 
ing is,  with  intent,  buried  under  a  mass  of  confusing 
verbiage.  The  facts  are  that  the  fire-insurance  policy, 
when  not  formulated  by  the  states  themselves,  is  a 
growth  rather  than  a  creation  of  any  one  man  or  set 
of  men.  It  has  been  more  carefully  considered  from 
all  sides  and  in  every  detail,  perhaps,  than  any  docu- 
ment yet  formulated  by  man,  and  probably  there  is  no 
document  in  which  as  wide  a  scope  of  definite  and 


340     •  LECTURES  ON  COMMERCE 

clearly  expressed  meaning  has  been  compacted  into  as 
few  words.  The  printed  portion  of  a  fire  policy,  which 
contains  practically  all  the  conditions  of  the  contract 
under  which  in  their  myriad  forms,  conditions  and 
circumstances,  all  the  values  of  the  world,  destructible 
by  fire,  are  insured,  embraces  about  one  thousand 
words,  w^iich  is  about  half  as  many  as  are  found  in 
an  ordinary  trust  deed.  A  careful  reading  of  a  fire 
policy  will  constrain  any  fair-minded  man  to  admit 
that  more  could  not  be  said  in  fewer  words  or  clearer 
language,  except  perhaps  where  the  language  has  been 
imposed  upon  the  companies  by  statutory  enactment. 
In  the  early  days  of  the  industry  each  company 
used  its  own  form  of  policy,  and  much  confusion  re- 
sulted from  conflicting  conditions,  especially  when 
several  companies  were  concerned  in  the  same  loss.  An 
insurable  interest  was  not  required.  The  idea  that 
the  contract  was  one  of  indemnity  was  not  embodied, 
and  the  absence  of  these  features  made  it  in  effect  a 
gambling  contract.  Gradually  the  structure  and  intent 
of  these  policies  began  to  crystallize  into  something 
like  uniformity,  though  no  attempt  seems  to  have  been 
made  to  make  the  language  of  all  printed  policies  the 
same  until  after  the  Boston  fire  of  1873,  when  the 
Massachusetts  legislature  formulated  a  standard  policy 
which  all  companies  transacting  business  in  that  state 
were  required  to  use.  This  form  was  substantially 
adopted  by  most  companies  for  use  in  other  states. 
Later  the  state  of  New  York  appointed  a  joint  com- 
mittee, composed  of  legislators,  attorneys,  and  prac- 
tical underwriters,  to  construct  a  policy,  and  the  result 
of  their  labors,  known  as  the  "New  York  Standard 
Policy,"  has  since  been  made  obligatory,  with  slight 


FIRE  INSURANCE  341 

modifications,  in  most  of  the  states,  and  even  where  not 
obHgatory  has  been  generally  adopted  by  the  com- 
panies. 

Briefly  described,  the  completed  fire  policy  in  current 
use  states  the  consideration,  amount  insured,  and  time 
limit,  and  identifies  the  property  by  a  written  or  printed 
description. 

If  it  is  necessary  to  make  the  terms  of  the  contract 
more  liberal  than  its  printed  conditions,  the  point  is 
covered  by  a  written  permit;  or,  on  the  other  hand, 
if  it  is  necessary  to  impose  conditions  not  mentioned 
in  the  printed  part  of  the  policy,  these  conditions  are 
set  forth  as  warranties  on  the  part  of  the  assured. 
The  printed  part  of  the  policy  states  that  the  company 
shall  not  be  liable  beyond  the  actual  cash  value  of  the 
property  at  the  time  of  fire,  after  proper  deduction  has 
been  made  for  depreciation ;  that  the  loss  shall,  in  no 
case,  exceed  what  it  would  cost  to  repair  or  replace  the 
property  insured;  and  that,  in  case  the  parties  cannot 
agree  upon  the  amount  of  loss,  the  company  and 
assured  shall  each  select  an  appraiser,  the  two  so 
selected  to  choose  a  third,  and  that  the  award  of  these 
appraisers  as  to  the  amount  of  loss  shall  be  decisive,  it 
being  optional  with  the  company  to  repair,  replace,  or 
rebuild  the  property  with  other  of  like  kind  and  quality. 
The  policy  then  goes  on  to  state  in  detail  what  will 
render  it  void,  what  it  does  not  cover,  how  it  may  be 
terminated  by  either  party,  and  what  is  necessary  for 
the  assured  to  do  after  a  fire.  Stated  in  a  nutshell,  this 
is  the  substance  of  the  fire  policy.  That  it  cannot  be 
materially  improved  is  shown  by  the  facts  that  it  has 
stood  the  fire  of  criticism  for  many  years,  that  legisla- 


342  LECTURES  ON  COMMERCE 

tive  bodies  have  not  been  able  to  add  to  or  subtract 
from  its  conditions  to  any  material  extent,  and  that 
for  more  than  a  generation  capital  has  not  been  tempted 
to  hazard  itself  under  the  terms  of  a  contract  more 
liberal  to  the  assured. 

It  will  be  noted  that  the  basic  idea  of  this  contract 
is  that  the  assured  shall  not  make  money  by  his  fire — 
shall  not  be  able  to  turn  his  misfortune  into  a  specula- 
tion; and  all  experience  shows  that  this  is  a  necessary 
safeguard  to  public  interests. 

When  a  company  receives  notice  of  a  loss,  it  becomes 
its  duty  to  fulfil  its  obligations.  A  representative 
must  be  promptly  dispatched  to  the  scene  of  the  fire  to 
adjust  the  loss  and  pay  the  insured  the  indemnity  he 
has  bargained  for.  The  adjustment  of  a  loss  is  often 
a  transaction  in  high  diplomacy.  The  amount 
involved  may  range  from  a  few  dollars  to  a  million 
dollars  or  more.  In  many  respects  an  adjustment 
resembles  an  ordinary  transaction  in  barter,  with  the 
important  difference  that  in  ordinary  barter  the  buyer 
has  an  opportunty  to  examine  the  object  he  buys.  The 
adjuster,  as  a  rule,  does  not.  In  ordinary  barter  the 
purchaser  pays  for  something  that  is;  in  fire  losses  the 
adjuster  pays  for  something  that  zuas.  He  is  called 
upon  to  purchase  something  analagous  to  a  pig  in  a 
poke,  or,  more  properly,  a  pig  that  was  in  a  poke. 

The  merchant  who  offers  his  goods  on  a  profit  of  i 
or  2  per  cent,  does  not  have  much  margin  for  "induce- 
ments" to  buyers.  The  aggregate  profits  of  fire 
underwriting  are  not  at  most  over  i  or  2  per  cent. 
Even  if  the  company  he  serves  has  been  exceptionally 
successful,   its   underwriting  profits   for   long  periods 


FIRE  INSURANCE 


343 


seldom,  or  never,  exceed  5  per  cent.,  which  is  equiva- 
lent to  an  average  of  not  more  than  fifty  cents  for  each 
thousand  dollars  at  risk.  With  this  slender  margin 
of  profit  the  adjuster  knows  that  if  he  allows  his 
sympathies  to  tempt  him  into  habitually  paying  the 
assured  the  smallest  percentage  in  excess  of  actual 
value,  he  will  change  his  company  from  a  money- 
making  into  a  money-losing  institution.  He  knows 
further  that  any  undue  liberality  on  his  part  will 
slowly  but  surely  create  a  moral  hazard  which  will 
reveal  itself  in  an  increased  loss  ratio.  He  knows 
that  if  he  leaves  behind  him  a  man  overpaid,  there  is 
a  strong  probability  that  some  of  his  observant  neigh- 
bors of  easy  virtue  will  soon  be  over-insured.  On 
the  other  hand,  he  knows  that  if  he  does  not  leave  the 
assured  with  a  conviction  that  full  justice  has  been 
done,  he  will  be  sure  to  tell  his  grievance  and  create 
a  prejudice  against  the  company  which  will  ruin  its 
business  in  the  town.  Between  these  contending 
influences  there  is  only  one  plain  course,  and  that  is  to 
be  strictly  judicial;  for  there  is  no  transaction  in  the 
realm  of  trade  in  which  there  is  less  room  for  adver- 
tising "inducements"  or  lordly  liberality  than  in  the 
adjustment  of  fire  losses.  On  the  other  hand,  per- 
haps no  other  negotiations  in  the  world  of  trade, 
volume  for  volume,  are  brought  to  a  conclusion  with 
more  tactfulness,  wiser  liberality,  or  less  friction. 
This  is  proven  by  the  fact  that  the  amount  of  losses 
in  litigation,  as  shown  by  published  statements  of  the 
companies,  is  so  small  that  it  hardly  constitutes  a 
percentage  of  their  annual  premium  receipts.  If  any 
evil    exists    in    the    adjustment    of    fire    losses,     it 


344  LECTURES  ON  COMMERCE 

undoubtedly  leans  toward  sympathetic  and  systematic 
liberality  in  the  settlement  of  honest  losses,  and  a  failure 
thoroughly  to  ventilate  those  that  bear  the  earmarks  of 
fraud.  It  would  be  idle  to  claim  that  mistakes  never 
occur  or  that  injustice  is  never  done  to  honest  claim- 
ants, but  these  mistakes,  as  a  rule,  are  the  result  of  a 
scarcity  of  the  peculiar  talent  necessary  in  the  difficult 
work  of  adjusting. 

An  ideal  adjuster  is  partly  born  and  partly  made 
by  experience,  but  no  experience  can  make  a  successful 
adjuster  unless  birth  has  done  its  part.  The  ideal 
adjuster  needs  not  only  to  be  honest,  but  to  look  honest. 
He  should  inspire  confidence  by  his  tact,  address,  and 
personal  magnetism.  He  ought  to  be  familiar  with 
insurance  law,  commercial  usage,  and  human  nature. 
He  needs  a  Sherlock  Holmes  nose  for  detecting  and 
tracking  fraud  to  its  lair,  and,  at  the  same  time,  a  nose 
equally  sensitive  to  the  aroma  of  honesty — a  nose 
that  will  lead  him  unerringly  along  the  path  that  lies 
between  the  boundaries  of  optimism  and  pessimism. 
He  must  know  much  of  the  nature  and  values  of  all 
classes  of  property.  He  ought  to  be  a  skilful  account- 
ant, and  enough  of  a  builder  to  make  a  detailed  esti- 
mate of  the  cost  of  replacing  a  vanished  building. 
He  ought  to  have  a  fair  knowledge  of  literature  and 
art,  know  books,  pictures,  music,  and  musical  instru- 
ments. He  ought  to  be  a  family  man  and  a  ladies' 
man,  in  the  best  sense  of  the  term.  He  ought  to  be  a 
connoisseur  in  pots,  kettles,  and  dish-pans,  cook  stoves, 
pianos,  photograph  albums,  Little  Liver  Pills,  Rad- 
way's  Ready  Relief,  and  all  the  long  category  of  allit- 
erative cure-alls,  sewing  machines,  silverware,  bedding, 


FIRE  INSURANCE  345 

books,  bicycles,  bonnets,  and  wearing  apparel,  without 
regard  to  age,  sex,  or  condition,  from  baby-linen  and 
ladies'  lingerie  to  hob-nailed  shoes,  golfing  suits,  St. 
Patrick's  Day  regalia,  and  liver  pads.     He  ought  to 
be  able  to  recognize  at  their  true  value  pictures  of  every 
school,  including  the  boarding  school.     He  ought  to 
be  an  expert  in  all  "objects  of  bigotry  and  virtue," 
with  their  endless  variety  and  range  in  value,   from 
the  plaster  casts  and  chromos  in  the  humble  home  of 
the  farmer  or  mechanic  to  the  priceless  art  treasures 
in    the    palace    of    the    plutocrat.     He    ought    to    be 
prepared  to  deal  with  all  these  things,   hallowed  by 
prejudice    or    associations,    bruised,    battered,    torn, 
water-soaked,    smoked    or    reduced    to    an    ash    heap, 
knowingly,   sympathetically,   reverently,  and  unflinch- 
ingly.    The  annals  of  statecraft  furnish  no  more  shin- 
ing examples  of  diplomacy  than  could  be  told  of  the 
everyday  experience  of  the  fire  adjuster. 

If  friction  in  the  adjustment  of  fire  losses  exists,  it 
is  because  the  man  who  can  be  and  do  these  things — 
the  ideal  adjuster — does  not  grow  on  every  bush. 

Every  prominent  company  employs  its  own  adjuster 
to  attend  to  its  miscellaneous  losses,  but  it  is  a  matter 
of  frequent  occurrence  for  a  fire  to  destroy  a  large 
risk  in  which  scores  of  companies  are  interested.  In 
such  cases  it  is  usual  for  the  companies  to  select  a 
small  committee  of  adjusters  to  settle  the  loss.  The 
difficulty  of  reaching  all  losses  promptly  and  of  secur- 
ing competent  adjusters  has  built  up  a  class  of  inde- 
pendent adjusters  who  are  located  in  large  cities. 
These  men  are  not  on  the  salaried  list  of  any  company, 
but  charge  for  their  services  on  each  loss,  and  where 


346  LECTURES  ON  COMMERCE 

they  serve  more  than  one  company  the  expense  is 
distributed  among  them  pro  rata.  In  a  few  of  the 
larger  cities  adjusting  associations  have  come  into 
existence,  and  in  time  the  economics  of  the  business 
will  compel  the  adjustment  of  all  large  losses  through 
these  associations,  as  they  simply  embody  the  specializa- 
tion now  found  in  every  branch  of  modern  industry. 
While  a  considerable  part  of  the  small-value  risks 
written  by  companies  must  be  accepted  or  rejected 
through  correspondence,  upon  the  inspection  and 
reports  of  local  agents,  the  selection  of  their  business 
depends  largely  upon  the  personal  inspections  of  sala- 
ried employees,  and  the  success  of  every  company  to  a 
large  degree  depends  upon  the  judgment  of  these 
"field-men"  in  weeding  out  untrustworthy  agents  and 
objectionable  risks,  and  effecting  reforms  in  physical 
hazard.  A  conscientious  and  capable  inspector  may 
save  his  company  thousands  of  dollars  by  a  single 
cancellation  or  by  effecting  reforms  in  the  physical 
hazard  of  risks  in  which  his  own  and  perhaps  many 
other  companies  are  interested.  A  judicious  sugges- 
tion to  the  owner  concerning  some  dangerous  feature  of 
his  property,  of  which  he,  perhaps,  is  ignorant,  may,  and 
often  does,  save  a  loss  amounting  to  several  hundred 
thousand  dollars,  and,  counting  exposed  property,  even 
millions  of  dollars.  Hence  it  will  be  seen  that  the 
work  of  the  inspector  benefits  not  only  all  insurance 
companies,  but  every  property  holder.  A  good  inspect- 
or is  a  reformer  in  the  morals  of  property,  and  indi- 
rectly in  the  ethics  of  its  owners.  It  is  his  duty  to 
study  property  of  all  kinds  in  its  relations  to  the  hazard 
of  fire.     He  should  have  a  pretty  fair  working  knowl- 


FIRE  INSURANCE 


347 


edge  of  mechanics,  physics,  chemistry,  and  electricity, 
and  of  the  laws  of  supply  and  demand  in  all  the 
leading  branches  of  trade  and  manufacture.  He 
should  be  a  good  judge  of  values,  of  men,  of  municipal 
affairs  and  their  prospects,  of  building  construction, 
of  the  safety  of  heating,  lighting,  electrical  and  fire- 
extinguishing  devices,  public  and  private,  as  well  as 
of  machinery,  friction,  dangerous  chemical  combina- 
tions, of  the  explosive  and  combustible  properties  of 
matter  in  its  combined  or  comminuted  forms,  and 
heaven  knows  how  many  other  things. 

The  universal  trend  of  the  business  toward  eco- 
nomic co-operation  is  shown  by  the  recent  evolution 
of  inspection  associations.  An  inspection  bureau  ex- 
ists in  this  city  to  which  about  forty  companies  be- 
long. This  bureau  employs  only  graduates  of  tech- 
nical schools  who  are  trained  for  their  specialty  and 
employed  in  examining  the  great  mercantile  and 
manufacturing  establishments  of  the  country.  This 
plan  has  been  found  to  secure  a  higher  grade  of 
inspection  at  less  expense,  and  saves  the  owners  from 
the  annoyance  of  frequent  inspections  on  the  part  of 
the  employees  of  the  several  companies.  The  work 
of  inspections  is  a  heavy  item  in  the  expense  account 
of  fire  insurance,  but  it  is  fruitful  in  saving  to  the 
companies  and  the  public,  and  the  tendency  is  to 
increase  this  expense  as  an  investment  equally  profit- 
able to  the  business  and  the  community. 

I  stated  at  the  outset  that,  strictly  speaking,  fire 
insurance  belonged  neither  to  the  creative  nor  eco- 
nomic industries,  but  it  is  necessary  to  modify  this 
statement,     for    through    its    inspections    alone    fire 


348  LECTURES  ON  COMMERCE 

insurance  saves  enough  fire  waste  annually  to  entitle 
it  to  rank  as  a  world-leader  in  practical  economics. 
Inspections  are  but  one  phase  of  its  economic  functions. 

Fire  departments  were  originally  owned  by  the 
fire-insurance  companies,  and  maintained  by  them, 
until  it  became  evident  that  they  were  an  economic 
necessity  to  the  entire  public,  when  they  were  trans- 
ferred to  municipal  control.  Under  the  tariff  system  a 
credit  is  allowed  for  fire  departments  according  to 
grade,  and  every  policy  holder  is  allowed  a  reduction 
in  his  rate  commensurate  with  the  degree  of  protec- 
tion. Not  only  the  existence,  but  the  efficiency,  of 
fire  departments  is  due  to  fire  underwriters,  for  they 
are  the  only  people  whose  experience  makes  them 
competent  to  advise,  and  the  only  people  directly  inter- 
ested in  securing  an  efficiency  commensurate  with  the 
rate  reductions  they  allow  for  these  departments. 

You  will  find  scattered  about  this  and  every  other 
large  city  numerous  fire-patrol  stations  with  teams, 
fire  extinguishers,  tarpaulins,  and  from  six  to  twenty 
men  at  each  station.  These  patrols  are  maintained 
at  the  expense  of  the  companies.  They  have  every 
known  device  to  enable  them  to  receive  the  earliest 
news  of  a  fire  and  to  reach  it  promptly.  Their  duty 
is  to  extinguish  a  fire,  if  possible,  in  its  incipiency, 
in  order  to  stop  the  damage  that  always  results  when 
the  engines  of  the  regular  fire  department  once  turn 
on  their  hose.  If  the  fire  cannot  be  extinguished  by 
the  patrol,  it  is  its  duty  to  cover  the  merchandise  in 
the  burning  building,  or  buildings  exposed  by  it,  with 
tarpaulins,  in  order  to  minimize  the  damage  from 
water  and  smoke.     These  patrols  also  publish  detailed 


FIRE  INSURANCE  349 

accounts  of  every  fire,  giving  an  estimate  of  the  dam- 
age and  stating  the  cause  of  the  fire.  This  information 
is  invakiable  in  an  educational  way,  and  the  direct 
saving  effected  by  patrols   is   incalculable. 

If  you  will  visit  the  Western  Salvage  Wrecking 
Co..  corner  of  Madison  and  Franklin  streets,  you  will 
find  an  immense  establishment  devoted  to  the  care  of 
merchandise  that  has  passed  through  a  fire.  Damaged 
merchandise  is  brought  here  from  all  over  the  W^est, 
and  every  dollar  saved  by  the  scientific  treatment  of 
and  restoration  of  values  in  this  merchandise  helps 
to  reduce  the  average  loss  ratio  and  everage  rate  of 
the  country. 

At  No.  67  East  Twenty-first  street  of  this  city  you 
will  find  an  extensive  laboratory  devoted  to  the  scien- 
tific investigation  of  physical  hazard.  Numerous 
experts  are  constantly  engaged  in  studying  the  new 
chemical  combinations  of  commerce ;  every  new  device 
for  utilizing  inflammable  oils  and  acetylene  gas  for 
motive,  heating,  or  lighting  purposes  is  here  care- 
fully investigated,  as  well  as  all  automatic  devices  for 
extinguishing  or  giving  notice  of  fires.  Electricity 
and  every  form  of  electrical  installation  are  under 
constant  and  careful  study.  All  these  things  are  per- 
mitted by  the  companies  only  under  careful  regula- 
tions predicated  upon  the  information  gathered 
through  this  and  other  instrumentalities  maintained 
by  the  companies. 

I  might  go  on  and  describe  other  things  of  a 
similar  nature,  but  these  will  suffice  to  show  that, 
while  the  organic  function  of  fire  insurance  is  simply 
to  measure  and  distribute  fire  hazard,  in  the  perform- 


350  LECTURES  ON  COMMERCE 

ance  of  this  function  it  is  forced  to  act  as  a  conservator 
of  property  values,  and  thus  becomes  one  of  the  most 
important  economic  forces  of  modern  civilization. 

This  fact  is  so  little  understood  by  the  public  and 
press  of  the  country  that  it  is  refreshing  to  find  a 
frank  acknowledgment  of  it  in  a  recent  issue  of  the 
Houston  Press,  of  Texas — a  state  where  seemingly 
no  expedient  has  been  left  untried  which  promised  to 
crush  out  all  possibility  of  co-operation  among  fire 
underwriters : 

It  is  a  mistake  to  believe  that  the  only  return  the  premium 
payer  gets  is  when  he  collects  his  insurance  money  after  a  loss; 
that  it  is  necessary  to  burn  out  to  win  in  fire  insurance.  An 
honest  insurer,  if  burned  out,  always  loses  in  inconvenience, 
anticipated  profits,  and  disruption  of  business.  The  insurance 
policy  only  protects  him  from  financial  loss  to  the  extent  of  the 
property  actually  burned  or  damaged.  Where  the  insurer  profits 
by  fire  insurance  is  in  the  fire-prevention  work  of  the  insurance 
companies.  The  whole  community  also  profits  by  this  and  is 
the  debtor  of  the  insurance  companies  and  the  people  who  pay 
the  premiums  and  make  such  work  possible. 

While  every  fire  company,  like  every  individual,  is 
a  selfish  entity,  all  companies  are  united  by  insepa- 
rable interests  into  a  whole,  consisting  of  "many  in 
one,"  just  as  the  several  states  constitute  a  union.  In 
this  e-plurihus-unum  nature  of  the  industry  is  found 
the  inexorable  necessity  for  co-operation  in  establishing 
common  knowledge,  common  usages,  and  a  common 
measurement  of  the  fire  hazard,  for  these  are  necessary 
to  establish  the  common  averages  which  enable  fire 
insurance  to  exist.  It  is  important  to  bear  these  facts 
in  mind,  because  they  tend  to  explain  a  fruitful  source 
of  misunderstanding  between  the  public  and  the  fire- 


FIRE  INSURANCE  351 

insurance  community.  The  necessities  of  their  busi- 
ness are  such  that  fire  underwriters  are  always  con- 
ferring together  over  the  innumerable  questions  which 
their  individual  experience  does  not  enable  them  to 
solve.  Like  birds  of  a  feather,  they  flock  together, 
not  because  they  love  each  other,  but  because  they 
are  indispensable  to  each  other.  Hence  we  find  fire- 
underwriting  associations  at  every  turn — local,  state, 
sectional,  and  national ;  associations  of  agents,  of  field 
men,  of  managers,  and  of  presidents;  associations  of 
adjusters,  inspectors,  raters,  statisticians,  experts  in 
electricity,  chemistry,  mechanics,  physics,  and  what 
not.  But,  aside  from  these  permanent  associations, 
there  is  a  never-ending  necessity  for  special  conference 
on  important  questions  of  temporary  interest.  Meet- 
ings of  this  kind,  sometimes  manv  of  them,  are  made 
necessary  by  every  considerable  conflagration,  and  by 
nearly  every  important  conflict  of  opinion.  In  the 
vast  majority  of  these  conferences  the  establishment 
of  a  harmonious  and  definite  purpose  is  as  necessary  to 
the  common  weal  as  to  the  weal  of  fire  insurance,  but 
these  constant  conferences  tend  to  create  an  impression 
in  the  public  mind  that  fire  underwriters  are  a  set  of 
arch  conspirators,  and  the  laws  of  many  states  have 
been  framed  with  the  special  purpose  of  shutting  off 
all  possibility  of  united  action  in  the  business. 

It  may  be  asked  why  the  necessity  for  this  constant 
exchange  of  views  exists  in  fire  insurance  to  a  greater 
extent  than  in  other  kinds  of  insurance;  for  they  all 
deal  in  averages.  The  answer  to  this  is  plain.  Other 
kinds  of  insurance  deal  in  averages,  but  they  deal  in 
the  averages  of  identity  alone,  while  fire  insurance  is 


352  LECTURES  ON  COMMERCE 

concerned,  not  only  in  the  averages  of  identity,  but 
with  the  relations  of  every  individual  instance  to  these 
averages.  Other  branches  of  insurance  deal  with 
classes  composed  of  individual  instances,  each  of  which 
is  required  to  conform  to  a  standard,  and  then  treated 
as  identical  with  all  others.  Fire  insurance,  too,  deals 
with  classes,  but  the  individual  instance  in  perhaps 
ninety-nine  cases  out  of  a  hundred  does  not  conform 
to  any  standard,  and  cannot  be  treated  as  an  identity. 
Its  relation  in  hazard  to  numerous  standards  must  be 
measured  and  specifically  established  and  stated  as 
its  rate,  and  from  every  standpoint  it  is  necessary  to 
deal  with  each  risk  as  a  separate  entity  instead  of  as 
an  identity  with  all  other  risks  belonging  to  its  class. 
This  individual  treatment  which  is  unavoidable  in 
fire  insurance  sets  it  apart  from  all  other  branches  of 
insurance.  Fire  insurance  is  not  a  jobber  in  averages, 
but  a  retailer,  and  this  not  only  makes  it  a  business  of 
infinite  detail,  which  is  the  concern  of  all,  but  keeps  it 
in  constant  and  unpleasant  evidence  before  the  public, 
which  cannot  understand  the  reason  for  its  never- 
ending  pourparlers,  caucuses,  confabulations,  and  inter- 
meddling with  their  property. 

If  the  life  companies,  instead  of  dealing  with  the 
identities  known  as  standard  lives,  were  compelled  to 
establish  their  rates  by  analyzing  the  human  body 
into  a  standard  heart,  stomach,  liver,  etc.,  and  were 
thus  forced  to  keep  these  and  other  vital  organs  up  to 
their  several  standards,  it  would  become  necessary  for 
them  to  establish  innumerable  expert  committees  on 
diagnostics,  prognostics,  therapeutics,  dietetics,  etc., 
and  send  around  inspectors  to   sound,   thump,   prod, 


FIRE  INSURANCE  353 

probe,  and  otherwise  inspect  each  of  their  risks  from 
cellar  to  cockloft,  and  ask  embarrassing  questions 
about  their  personal  condition  and  habits.  It  is  easy 
to  see  that  with  all  this  thumping  and  pumping  the  lot 
of  the  merchant  prince  with  several  hundred  thousand 
dollars  of  life  insurance,  like  that  of  the  policeman 
in  the  Mikado,  would,  all  in  all,  not  be  a  happy  one. 
Life  insurance  escapes  these  things  because  it  does  not 
concern  itself  with  specific  instances.  Fire  insurance 
is  foredoomed  to  eternal  servitude  to  the  individual 
instance;  Jiitic  iliac  lacrimae. 

The  difficulty  of  measuring  the  relative  hazard  of 
each  risk  is  augmented  at  the  outset  by  the  important 
fact  that  this  relative  hazard  is  largely  determined  by 
the  form  of  the  contract.  In  life,  and  other  forms 
of  insurance  dealing  with  simple  averages,  every  risk- 
unit,  being  a  simple  identity,  is  protected  by  identical 
contracts.  The  same  policy  blank  may  be  made  to 
serve  for  any  risk-unit  by  simply  inserting  the  name, 
date,  amount,  and  consideration;  but  in  fire  insurance 
diversity  of  contracts  is  commensurate  with  the  diver- 
sity in  risks. 

It  is  possible  through  the  wording  of  a  policy  to 
cover  property  that  is  widely  scattered,  and  not  all 
subject  to  destruction  by  one  fire.  To  illustrate: 
Let  us  suppose  that  a  manufacturer  starts  in  a  small 
way  with  a  single,  open  building,  which,  with  its 
contents,  is  liable  to  destruction  by  a  single  fire.  He 
insures  this  property  for,  say,  80  per  cent,  of  its  value. 
The  growth  of  his  business  soon  compels  him  to  erect 
another  building  separated  by  a  fire-proof  wall,  or 
perhaps  by  space  so  great  that  there  is  little  or  no 


354  LECTURES  ON  COMMERCE 

danger  of  both  buildings  being  destroyed  by  the  same 
fire.     He  asks  the  insurance  companies  to  spread  his 
poHcies  to  cover  the  new  building  as  well  as  the  old, 
so  that  in  the  event  of  a  fire  in  either  building  he  will 
be   able   to   collect   his   loss.      It    is    evident   that   by 
thus  spreading — or,  as  it  is  called,  "blanketing" — his 
insurance  he  secures  twice  as  much  indemnity  as  he 
paid  for  and  thus  reduces  his  rate  one-half.     As  his 
business  expands  he  may  erect  other  buildings  which 
constitute   separate   risks,    and    if   he   could    keep   on 
blanketing  his  policies,   he   would   finally  be  able  to 
reduce   his   rate   and   secure   indemnity   covering   ten 
times  as  much  property  as  he  has  paid  for.     This  is 
a  reductio  ad  ahsurdum  perhaps,  but  the  fact  remains 
that  there  is  a  constant  pressure  from  the  owners  of 
similar  property  to  have  their  policies  so  worded  as 
to  cover  the  largest  possible   value   for  the  smallest 
possible  consideration;    in  other  words,  to  dodge  as 
large  a  share  of  their  fire  tax  as  possible.     It  is  fair 
to  add,  however,  that  there  is  in  many  instances  an 
imperative  necessity  for  what  is  known  as   "blanket 
insurance."     It  is  possible,  say,  for  a  manufacturer  to 
estimate  the  value  of  each  building  and  its  machinery, 
but  his  materials,  "raw,  wrought,  and  in  process,"  are 
constantly  floating  around  in  different  buildings,  and 
it  is  impossible  for  him  to  tell  how  much  value  will 
be  in  any  one  building  at  the  time  of  fire,  or  how  much 
insurance  he  will  need.     This  difficulty  is  met  by  writ- 
ing a  blanket  policy  covering  all  his  buildings  with 
either    a    distribution    or    co-insurance    clause.     The 
former  provides  that  the  policy  shall  attach  in  each 
building  or  division  in  such  proportion  as  the  value 


FIRE  INSURANCE  355 

therein  shall  bear  to  the  entire  value  of  the  property 
insured.  The  latter  provides  that  the  assured  shall 
maintain  insurance  on  the  property  to  a  certain  pro- 
portion of  its  value  (generally  80  per  cent.),  and  that, 
failing  to  do  this,  he  becomes  a  co-insurer  to  the  extent 
of  the  deficit,  and  to  that  extent  shall  bear  his  propor- 
tion of  the  loss.  These  clauses  simply  compel  the 
assured  to  keep  his  property  insured  for  an  adequate 
part  of  its  value,  and  if  he  does  this,  the  clauses  have 
no  effect  in  the  settlement  of  his  loss.  Strange  as  it 
may  seem,  the  companies  are  forbidden  by  law  in 
many  states  to  use  either  clause. 

The  pressure  for  blanket  insurance  emanates  almost 
exclusively  from  the  ownership  of  large  and  scattered 
values.  It  is  most  prevalent  among  large  mercantile 
and  industrial  establishments,  warehouses,  railway, 
and  other  property  belonging  to  corporations  and 
trusts;  and  in  forbidding  the  only  policy  condition 
that  will  prevent  these  concerns  from  loading  a  large 
share  of  their  fire  tax  upon  small  property  owners,  the 
politicians  have,  unconsciously  perhaps,  joined  in  a 
"hold-up"  of  the  community  for  the  benefit  of  those 
whom  they  are  accustomed  in  their  stump  speeches  to 
refer  to  as  robber  barons. 

But  the  relation  of  insurance  to  value,  like  all 
dilemmas,  has  two  horns.  Property  such  as  I  have 
described  is  free  from  what  is  known  as  moral  hazard. 
In  no  event  could  it  be  totally  destroyed.  In  no 
probable  case  could  the  assured  sell  out  ''lock,  stock, 
and  barrel"  to  the  insurance  companies.  In  such  risks 
a  fire,  in  ninety-nine  cases  out  of  a  hundred,  simply 
causes  a  temporary  suspension  of  a  profitable  business, 


356  LECTURES  ON  COMMERCE 

with  inconvenience  and  loss  of  prospective  profits  to 
the  owners.  Experience  has  shown  that  there  is  com- 
paratively no  danger  resulting  from  the  moral  hazard 
of  over-insurance  with  property  of  this  kind. 

On  the  other  hand,  over-insurance  is  a  constant 
menace,  not  only  to  the  companies,  but  to  the  com- 
munity. When  an  owner  has  a  motive  for  being 
careless  or  applying  the  torch  to  his  property,  no  rate 
offers  any  temptation,  for  the  law  of  averages  is  set 
at  naught.  This  danger  might  be  said  to  infect  risks 
liable  to  total  destruction  by  a  single  fire,  and  suppos- 
ably  exists  in  all  cases  where  such  property  is  insured 
for  all,  or  more  than,  its  value.  With  all  the  care 
that  can  be  exercised  in  scrutinizing  the  relations 
between  insurance  and  value,  it  is  an  undisputed  fact 
that  there  is  a  constant  process  of  selling  property  to 
the  fire  companies.  Every  company  is  dependent  for 
such  information  as  it  can  get  regarding  value  upon 
either  the  assured  himself  or  its  local  agent,  and  the 
danger  of  over-insurance  is  largely  unavoidable.  The 
only  safeguard  against  this  danger  is  found  in  what 
is  known  as  the  "Three-fourths  Value  Clause,"  which 
provides  that  in  the  event  of  loss  the  insurance  shall 
not  be  liable  for  an  amount  greater  than  three-fourths 
of  the  actual  cash  value  of  the  property  at  the  time  of 
the  fire.  As  an  incendiary  fire  may  not  only  destroy 
the  building  insured,  but  many  buildings,  and  occa- 
sionally an  entire  town  or  city,  it  will  be  seen  that  this 
clause  constitutes  an  equitable  safeguard  against  the 
dangers  of  incendiarism;  notwithstanding  this  fact 
many  states  forbid  the  use  of  this  clause  and  compel 
an  insurance  company  in  the  event  of  the  destruction 


FIRE  INSURANCE  357 

of  a  building  to  pay  the  amount  named  as  the  limit  of 
liability  in  its  policy,  regardless  of  the  actual  value  of 
the  property  destroyed. 

I  have  endeavored  to  explain  to  you  how,  at  the 
very  outset,  fire  insurance  is  confronted  with  the 
problem  of  establishing  uniform  relations  between 
value  and  insurance  as  a  condition  precedent  to  any 
attempt  to  establish  equitable  relations  in  the  measure- 
ment of  the  hazard  found  in  each  risk;  in  other 
words,  in  the  attempt  to  rate  it  truly.  I  have  pointed 
out  to  you  the  simple  and  just  means  of  accomplishing 
this  through  policy  conditions  which  are  interdicted 
by  the  laws  of  many  states.  You  will  readily  infer 
from  what  has  been  said  that  the  correct  ascertain- 
ment of  value  is  a  condition  precedent  to  the  equitable 
treatment  of  the  public,  because  every  deviation  from 
uniformity  in  the  relation  of  insurance  to  value  must 
cause  one  of  two  things — either  an  increase  of  loss 
through  incendiarism,  or  an  unjust  distribution  of  the 
tax  to  which  all  policy  holders  must  contribute. 

If  we  turn  our  attention  for  a  moment  to  state  and 
municipal  taxes,  we  shall  find  that  the  ascertainment 
of  property  values  is  the  beginning  and  end  of  the 
work  of  assessors,  boards  of  equalization,  and  boards 
of  review.  How  well  these  officials  succeed  in  their 
comparatively  simple  task  we  may  learn  from  the 
constant  criticism  of  their  work  in  our  daily  press. 
Fire  insurance,  too,  must  ascertain  values  before  it  can 
intelligently  rate  or  insure  a  risk,  and  if  its  methods 
are  not  faultless  it  can  at  least  plead  the  example  set 
through  its  officials  by  the  state  itself.  But  this  ascer- 
tainment of  values  is  simply  the  beginning  of  the  work 


358  LECTURES  ON  COMMERCE 

of  rating  itself,  which  constitutes  a  problem  as  difficult 
and  complex  as  may  be  found  in  any  of  the  modern 
sciences — even  more  difficult,  perhaps,  for  the  scientist 
deals  with  truthful  matter,  while  fire-rating  is  per- 
turbed from  within  and  without  by  the  prejudices  and 
passions  of  men. 

Fire  insurance  possesses  no  secret  which  enables  it 
to  thrive  upon  the  sale  of  its  indemnity  at  less  than 
cost.  Its  profit  margin  cannot  be  measured  by  single 
years,  for  it  is  established  by  periods  of  years,  and  for 
any  ten-year  period  we  may  select,  since  its  combined 
statistics  have  been  kept,  we  shall  find  that  its  outlay 
for  losses  and  expenses  has  almost  exactly  equaled  its 
premium  receipts — in  other  words,  that  its  indemnity 
has  been  sold  at  cost.  With  this  equipoise  produced 
by  obscure  laws  of  causation,  found  perhaps  in  every 
form  of  intense  competition,  it  is  self-evident  that  it 
cannot  grant  competitive  rates  to  a  single  state,  prop- 
erty class,  or  policy  holder  without  adding  to  the  rates 
of  some  other  state,  property  class,  or  policy  holder. 
As  with  all  other  forms  of  taxation,  a  concession  to 
Peter  is  a  robbery  of  Paul. 

The  subject  of  fire-rating  bristles  with  so  many 
complications  that  any  attempt  to  explain  it  in  detail 
in  the  short  time  at  my  disposal  will,  I  fear,  lead  you 
into  a  quagmire  of  confusion.  Mathematicians  have 
figured  out  that  under  the  law  of  permutation  the 
twenty-six  letters  of  the  alphabet  may  be  combined 
into  trillions  of  pronounceable  combinations,  and  that 
the  fifty-two  cards  in  a  deck  are  susceptible  of  so  many 
combinations  that  if  the  entire  population  of  the  world 
were  to  deal  cards  day  and  night  for  a  hundred  million 


FIRE  INSURANCE  3 eg 

years,  they  would  not  exhaust  one  hundred-thousandth 
part  of  the  possible  deals.  The  causes  of  fire  are 
countless;  if  we  limit  these  causes  to,  say,  one  thou- 
sand, the  possible  combinations  of  causes  of  fire  found 
in  destructible  property  would  make  a  row  of  figures 
that  would  girdle  the  world.  You  will  readily  see 
that  to  estimate  the  relative  effect  of  each  of  these 
causes  would  be  as  vain  as  an  attempt  to  count  the 
sands  of  the  seashore.  But  these  causes,  as  numerous 
as  they  are,  are  multiplied  by  the  causes  found  in  other 
property  exposing  the  risk.  We  have  thus  a  numerical 
series  of  combinations  approximating  infinity,  but  this 
does  not  end  it,  for  in  addition  to  these  active  causes 
of  fire  there  is  another  long  series  of  conditions  which 
simply  exercise  an  influence  in  determining  the  extent 
of  each  fire,  some  accelerating  and  some  retarding  it. 
All  these,  however,  are  not  incident  to  every  risk.  A 
certain  limited  number  cluster  about  each  property 
class,  and  it  is  the  business  of  fire  insurance  to  study 
and  familiarize  itself  with  the  principal  causes  and  in- 
fluences incident  to  each  class. 

All  these  things  are  plainly  classifiable  under  two 
heads,  physical  and  psychological.  Physical  causes 
are  inherent  in  property  itself,  and  are  designated  by 
the  name  "physical  hazard."  Psychological  causes 
are  found  in  human  nature,  and  constitute  what  is 
known  as  "moral  hazard."  Moral  hazard  is  obscure, 
far-reaching,  and  not  measurable.  All  who  pay  the 
insurance  tax  must  help  to  pay  for  moral  hazard.  It 
is  found  in  the  owner  of  property  in  a  degree  that 
corresponds  with  the  proportion  of  insurance  to  value. 
It  is  found  among  his  enemies  in  proportion  to  the 


360  LECTURES  ON  COMMERCE 

dynamics  of  their  enmity,  modified  by  moral  training 
and  environment.  It  may  come  from  carelessness  on 
the  part  of  owners,  employees,  or  customers.  It  may 
emanate  from  a  tramp,  or  a  person  suffering  from  the 
form  of  insanity  known  as  pyromania ;  or  it  may 
start  from  a  mere  child  through  carelessness  or  malice. 
Recently  a  ten-year-old  Chicago  boy  confessed  to  hav- 
ing started  four  fires  because  he  wanted  to  see  the 
engines  play.  More  recently  an  incendiary  was  con- 
victed by  the  courts  in  this  city  who,  with  good  reason, 
is  supposed  to  have  destroyed  property  exceeding  one 
million  dollars  in  value. 

In  physical  hazard  we  find  incendiaries  in  the  most 
insignificant  and  unsuspected  things.  An  air-bubble 
in  a  window  glass,  a  lens,  or  a  decanter  may  focus  the 
sun's  rays  and  start  a  fire.  A  greasy  rag  thrown  into 
a  closet  or  corner  and  forgotten  may  break  out  into 
flames  at  any  time.  Again,  things  in  themselves 
innocuous  become  dangerous  in  combination  or  in 
mere  juxtaposition.  A  cow  and  a  coal-oil  lamp 
between  them  started  a  historical  conflagration.  A 
child  and  a  match,  or  a  mouse  and  a  match,  constitute 
a  combustible  juxtaposition.  A  woman,  a  candle,  and 
an  imaginary  man  under  the  bed  constitute  a  cubed 
juxtaposition  as  it  were.  Gasoline  stoves  are  justly 
considered  one  of  the  most  prolific  sources  of  fires, 
yet  a  recently  published  list  stating  the  origin  of  fires 
in  St.Louis  for  1901  shows  that  one-half  as  many  fires 
were  started  by  balloons  falling  on  roofs,  and  one- fourth 
as  many  by  Christmas  trees,  as  by  blazing  gasoline 
stoves;  which  facts  go  to  prove  that  a  due  regard 
for  economics  should  prompt  our  lawmakers  to  change 


FIRE  INSURANCE  361 

Christmas  and  the  Fourth  of  July  to  the  Twenty-ninth 
of  February.  Hot  ashes  are  looked  upon  by  under- 
writers as  one  of  the  most  prolific  sources  of  fire,  but 
I  find  from  a  similar  report  of  this  city  for  1901  that 
sixty-one  fires  originated  from  hot  ashes,  while  two 
hundred  and  ninety-eight  originated  from  prairie  fires 
— a  ratio  of  five  to  one.  The  two  lists  enumerate 
over  twenty-three  hundred  fires  from  unknown  causes ; 
and  in  this  connection  it  is  proper  to  add  that  another 
baffling  difficulty  in  the  measurement  of  hazard  is 
met,  for  the  origin  of  fires  in  the  great  majority  of 
instances  is  not  ascertainable,  and  hence  not  estimable 
as  a  factor  of  causation. 

Every  modern  building  has  evolved  a  nervous  sys- 
tem of  its  own,  consisting  of  innumerable  electric  wires 
which  thread  its  innermost  recesses,  cluster  like  cob- 
webs about  its  inner  and  outer  surfaces,  and  roam  off 
at  will  through  crowded  alley-ways  and  dark  conduits 
to  consort  together  and  lap  up  skim-milk-colored 
lightning  in  some  den  of  purring  dynamos  with  glit- 
tering teeth  and  death  in  their  eyes.  A  dusty  electric 
wire  is  one  of  the  limpest  and  most  harmless  looking 
things  imaginable,  but  it  belies  its  looks.  Aside  from 
its  cat-like  fondness  for  disreputable  localities,  it 
exhibits  other  feline  traits — it  exhibits  a  more  than  cat- 
like suddenness.  Stroke  its  back,  or  even  touch  it, 
and  the  life-  and  property-destroying  sparks  will  fly. 
It  has  a  cat's  aversion  to  water — a  mere  drop,  even  a 
little  moisture,  is  liable  to  throw  it  into  a  conniption 
fit  known  as  a  short  circuit,  and  cause  it  to  spit  liquid 
fire  from  Dan  even  unto  Beersheba.  A  chance  meeting 
between  a  mild-mannered  tabby  of  the  telephone  vari- 


362  LECTURES  ON  COMMERCE 

ety,  hailing  from  an  eminently  respectable  residence 
quarter,  and  a  slouching  Thomas  cat  of  the  arc-light 
breed  from  the  Stock  Yards,  is  apt  to  raise  a  disturb- 
ance that  can  be  suppressed  only  by  calling  out  the 
fire  department.  Tread  on  the  tail  of  one  of  these 
grimalkins  of  any  breed  almost  anywhere,  and  it  is 
liable  to  arch  its  back  and  expectorate  blue  ruin  almost 
any  elsewhere,  possibly  several  elsewheres;  for  as 
many  as  seven  simultaneous  fires  have  been  known  to 
be  started  by  a  single  electric  wire. 

The  futility  of  any  attempt  to  analyze  and  measure 
the  relative  hazard  of  the  innumerable,  and  in  most 
cases  unknown,  causes  of  fires,  is  self-evident.  Fire- 
rating  is  not  done  in  this  way.  Whether  we  consider 
it  a  science  or  an  art — one,  both,  or  neither — it  deals 
in  broad  effects — somewhat  like  the  scene  painter  as 
compared  with  the  miniature  painter.  Fire-rating 
accomplishes  the  task  of  fixing  its  selling  prices  or 
rates  by  what  is  known  as  the  "schedule  system," 
which,  at  the  outset,  may  be  described  as  an  equitable 
system ;  for  the  fire-insurance  schedule  does  not  recog- 
nize individuals,  dealing  only  with  physical  hazards. 
This  system  consists  of  what  is  known  as  a  "basis 
schedule"  of  each  important  property  class.  These 
schedules  are  applied  to  specific  risks,  and  the  estab- 
lished rates  of  each  town  are  grouped  and  arranged 
by  blocks  and  street  numbers,  and  published  under  the 
name  of  a  "local  tariff,"  so  that  it  is  only  necessary  to 
refer  to  the  proper  tariff  to  find  the  rate  of  any 
scheduled  risk  in  the  United  States. 

You  are  doubtless  curious  to  know  how  basis  sched- 
ules are  constructed.     Possibly  your  studies  may  have 


FIRE  INSURANCE  363 

taught  you  before  this  (if  not,  your  experience  will 
later  on)  that  such  order  and  system  as  man  has  been 
able  to  establish  is  the  result  of  comparison.  We  know 
things  by  comparing  them  with  other  things  and  noting 
their  points  of  resemblance.  Constant  comparison, 
however,  is  not  only  tiresome  to  the  mind,  but  too  slow 
for  the  practical  work  of  life;  so  when  we  once  estab- 
lish points  of  resemblance  between  two  or  more  things 
sufficiently  close  for  our  purposes,  we  call  them  the 
same,  and  thereby  relieve  the  mind  from  the  necessity 
for  future  comparisons,  for  we  feel  safe  in  treating 
them  as  identities  and  dealing  with  all  identities  as 
a  class,  leaving  the  reasoning  faculties  free  for  their 
endless  function  of  establishing  relations  among  these 
grouped  identities.  But  identity  is  an  imaginary  thing, 
for,  theoretically  no  two  things  are  absolutely  the 
same.  We  simply  call  two  things  the  same  if  they 
are  the  same  for  the  specific  purpose  we  have  in  view. 
In  our  city  post-office  the  man  who  carries  letters  from 
the  receiving  dump  to  the  distributing  tables  looks 
upon  all  letters  as  identities,  and  they  are  for  the  end 
he  has  in  view.  To  the  first  clerk  all  letters  that  go 
north,  east,  south,  or  west  are  identities.  To  the  next 
clerk  all  letters  that  are  to  be  sent  by  a  given  railway 
are  identities.  To  the  clerks  in  the  postal  car  all  letters 
that  go  to  a  given  town  on  the  line  are  identities.  To 
the  postmaster  in  the  town  all  letters  directed  to  the 
same  postoffice  box  or  individual  are  identities.  It 
will  be  seen  that  "identity"  has  an  entirely  different 
meaning  to  each  of  these  men  according  to  the  end  he 
has  in  view. 

The  making  of  rates  requires  a  similar  reasoning 


364  LECTURES  ON  COMMERCE 

process,  and  the  identities  lire  insurance  recognizes  are 
such  as  are  necessary  for  its  purposes. 

It  estabhshes  standard  towns,  graded  according  to 
the  degree  of  fire  protection,  and  calls  them  identities. 

It  establishes  standard  buildings — frame,  brick, 
brick-veneered,  ironclad,  fireproof,  etc. — and  calls  them 
identities. 

It  grades  mercantile  stocks,  establishing  certain 
standards,  and  calls  them  identities. 

It  is  proper  to  admit  that  no  two  towns  or  buildings 
or  stocks  of  a  given  standard  are  absolute  identities. 
Like  all  other  identities,  they  are  simply  such  as  are 
adequate  for  the  purpose  in  view — just  such  as  every 
one  of  you  is  making  or  recognizing  every  minute  of 
your  conscious  life. 

As  very  few  towns  or  buildings  or  mercantile  stocks 
conform  absolutely  to  these  standards,  it  is  necessary 
to  select  the  most  important,  tangible,  and  definite 
features  of  deviation,  and  establish  each  of  these  as  an 
identity  by  a  fixed  charge  or  credit,  thus  creating 
another  series  of  standards,  from  which  may  ramify 
still  another  series  of  charges  and  credits  for  deviations. 
Thus,  let  us  say,  no  two  skylights  or  wellholes  in  a 
building  are  the  same;  hence  an  arbitrary  standard 
for  each  is  selected  and  a  charge  established  for  it,  as 
well  as  a  scale  of  charges  for  deviations.  In  this  way 
special  analysis  is  applied  to  each  important  property 
class,  as  dwellings,  public  buildings,  stores,  and  all  the 
innumerable  industrial  risks,  such  as  wood-workers, 
metal-workers,  wood-  and  metal-workers,  textile  mills, 
pork  houses,  flouring  mills,  etc.,  etc.;  the  analysis 
in  each  case  depending  upon  the  complexity  of  hazard. 


FIRE  INSURANCE  365 

In  some  classes  a  few  charges  and  credits  suffice;    in 
others  they  run  up  into  the  hundreds. 

Again,  every  risk  may  derive  a  share  of  its  hazard 
from  exposing  property,  and  this  hazard  may  range 
from  a  mere  nothing  to  a  hazard  far  greater  than  that 
of  the  risk  itself.  The  exposure  hazard  is  computed 
by  a  scale  of  charges  which  takes  into  account  the 
hazard  that  a  risk,  according  to  its  nature,  receives 
and  imparts.  These  we  might  call  the  hazard  of 
attack  and  defense,  with  a  third  factor  found  in  remov- 
able property,  which  modifies  its  exposure  hazard  in 
proportion  as  it  is  possible  to  remove  it  from  the 
vicinity  of  a  fire  either  in  the  building  which  contains 
it  or  in  an  exposing  building. 

But  before  the  work  of  practical  rating  can  begin, 
it  is  necessary  to  dispose  of  the  problem  found  in  the 
innumerable  features  of  hazard  which  utterly  refuse 
to  be  yoked  together  as  separate  identities,  and  in 
another  important  series  of  factors  which  defy 
analysis,  and  hence  must  be  equitably  spread  over  all 
classes.  This  difficulty  is  met  by  "rounding  up"  all 
these  isolated  or  mixed  causes  into  one  composite 
identity  which  is  known  as  a  "basis-rate."  A  separate 
basis- rate  is  established  for  each  important  property 
class,  and  in  most  cases  several  basis-rates  for  each 
class,  according  to  the  municipal  and  structural 
standard  under  which  it  comes. 

The  principal  elements  of  hazard  which  compose 
the  basis-rate  are,  let  us  say,  taxes,  fixed  expense,  moral 
hazard,  the  residue  of  exposure  hazard  which  cannot 
be  taken  up  under  existing  exposure  tables,  or  analyti- 
cally treated,  as,  say,  the  conflagration  hazard  found 


366  LECTURES  ON  COMMERCE 

in  cities  which,  in  a  manner,  makes  every  village,  town, 
and  city  a  single  risk.  To  these  must  be  added 
the  surplus  indemnity  secured  under  blanket  insurance 
by  the  tax  dodgers,  and  all  the  innumerable  unanalyz- 
able  causes  which  start  fires  of  known  and  unknown 
origin,  as  greasy  rags,  chemical  combinations.  Fourth 
of  July  balloons,  Christmas  trees,  mice,  matches,  etc., 
etc.  All  these  things  lie  outside  the  pale  of  analysis 
and  refuse  to  be  established  as  identities,  but  logic  tells 
us  that  as  a  composite  group  they  bear  a  constant,  if 
vague,  relation  to  the  average  hazard  of  each  class; 
for  it  is  a  known  fact  that  certain  of  these  things  under 
some  unknown  law  gather  about  any  given  species  of 
property,  and  this  fact  enables  rating  experts  to  esti- 
mate the  sum  of  hazard  found  in  these  causes  incident 
to  each  and  every  important  class  of  property.  In  this 
way  another  series  of  identities  is  established  in  what 
are  known  as  basis-rates.  Though  we  know  that  the 
hazard  embodied  in  each  of  these  basis-rates  is  not  the 
same  in  any  two  risks,  the  identity  is  adequate  to  the 
purpose  in  view.  From  this  you  will  see  that  the  basis- 
rate  is  a  something — call  it  a  catch-all,  composite, 
residuum,  nucleus,  or  what  you  will — of  undifferenti- 
ated hazard. 

You  ask:  How  is  it  possible  to  guess  within  gun- 
shot of  the  relative  hazard  of  all  these  things?  In 
reply  to  this  I  can  only  say  that  the  intuition  born  of 
experience  and  conference  enables  underwriters  to  es- 
tablish basis-rates  with  an  accuracy  that  is  as  notable, 
perhaps,  as  the  intuition  which  enables  your  professors 
of  paleontology  to  look  at  a  thigh  bone,  tooth,  or 
footprint  and  tell  you  when  and  where  the  animal  lived, 


FIRE  INSURANCE  367 

what  it  ate,  its  habits  and  race  history.  Similar  intui- 
tion is  found  in  nearly  every  business  and  art,  from  the 
man  who  will  tell  you  within  a  few  pounds  the  weight 
of  a  steer  "on  hoof,"  or  the  mechanic  who,  with  a 
pair  of  calipers,  can  feel  a  difference  in  diameter  of 
less  than  one-thousandth  of  an  inch,  to  the  art  con- 
noisseur who  on  sight  of  a  dingy  canvas  can  tell  you 
its  school,  its  era,  and  in  many  cases  name  the  long- 
dead  artist  who  painted  it. 

It  has  been  the  constant  effort  of  the  lawmakers  in 
Populistic  states  to  kill  schedule-rating,  on  the  theory 
that  anything  that  establishes  a  common  selling  price 
for  competitors  is  in  the  nature  of  a  trust ;  but  fire 
insurance  renders  a  service  for  which  it  must  impose  a 
tax,  and  the  basic  theory  of  every  tax  is  equity  in 
assessment.  No  one  has  volunteered  to  show  how 
the  fire  tax  may  be  fairly  assessed  in  any  w'ay  other 
than  through  schedules.  Open  competition  simply 
fixes  the  tax  with  reference  to  the  financial  standing 
or  personal  influence  of  the  owner,  without  regard  to 
the  hazard  of  the  property,  and  this  means  favoritism 
to  the  financially  strong  at  the  expense  of  the  financially 
weak.  Every  deviation  from  the  hazard  relations 
established  by  tariffs  proves  this  fact. 

Schedule-rating,  even  in  its  present  half-developed 
status,  constitutes  without  doubt  the  most  elaborate  and 
the  fairest  system  yet  devised  for  assessing  a  tax  with 
practical  as  well  as  theoretical  equity — an  equity  in 
which  the  hazard  of  the  thing  insured  is  alone  consid- 
ered, regardless  of  the  person  behind  the  thing.  But 
it  would  be  idle  to  claim  that  it  is  a  complete,  or  even, 
as  far  as  it  goes,  a  perfect  system. 


368  LECTURES  ON  COMMERCE 

From  what  has  been  said  you  doubtless  realize  that, 
as  a  S3^stem,  schedule-rating  consists  of  the  establish- 
ing of  relations  in  hazard ;  that  it  deals  with  a  complex 
problem  of  relativity.  Year  after  year  there  is  an 
unending  succession  of  changes  in  the  loss  and  expense 
ratio,  which  together  constitute  the  cost  ratio  of  fire 
insurance;  and  there  is  an  imperative  necessity  that 
rates  shall  be  changed  with  some  regard  to  the  fluctu- 
ating cost  of  the  thing  sold.  The  present  tariff  system 
makes  no  provision  whatever  for  making  these  changes 
in  rates.  It  is  simply  a  system  of  static  relations. 
To  make  rate  changes  it  is  necessary  to  construct 
new  basis  schedules,  which  are  merely  a  congeries  of 
untried  suppositive  relations,  and  then  apply  these 
schedules  in  making  hundreds,  perhaps  thousands,  of 
local  tariffs.  To  rerate  the  entire  country  in  this  way 
is  a  task  of  greater  magnitude  and  expense  than  that 
of  taking  a  national  census.  Before  these  new  tariffs 
can  be  applied  there  is  almost  sure  to  be  a  rise  or  fall 
in  the  wave  of  annual  loss,  which  makes  the  new  rates 
either  too  low  or  too  high.  There  is  no  assurance  that, 
when  they  become  effective,  the  new  rates  will  fit  exist- 
ing conditions  any  better  than  the  old  rates.  If  too 
high,  there  is  a  revolt  on  the  part  of  the  public,  and 
an  immediate  growth  of  mushroom  competition  which 
makes  it  necessary  to  begin  at  once  the  work  of  daub- 
ing the  new  tariffs  with  competitive  rates.  These 
competitive  rates,  from  their  nature,  are  out  of  align- 
ment with  other  rates,  and,  as  they  multiply,  soon 
destroy  all  relativity  as  well  as  all  fairness  in  the  tariffs. 
Again,  high  rates  generate  preferred  classes,  which  are 
greedily  sought  by  companies  willing  to  pay  high  com- 


FIRE  INSURANCE  369 

missions,  and  this  leads  inevitably  to  a  permanent 
increase  in  the  expense  ratio,  which  must  ultimately 
be  made  good  by  the  public.  If  rates  are  temporarily 
too  low  on  some  classes,  other  classes  must  make  good 
the  deficit.  If  too  low  on  all  classes,  there  is  an 
exodus  of  insurance  capital,  until,  in  a  panic,  rates 
are  sent  skyward  by  a  percentage  advance  which, 
unlike  the  rain,  falls  harder  on  the  righteous  than 
on  the  unrighteous;  for  the  man  who  is  already 
paying  the  highest  rate,  relatively,  must  submit  to  the 
largest  increase  under  the  percentage  advance. 

The  result  of  this  is  that  the  house  of  fire  insurance 
is  a  house  undergoing  constant  alterations  and  repairs. 
The  hammer  and  saw  of  the  builder,  and  the  pickax 
and  shovel  of  the  wrecker,  never  cease  their  din  in 
the  process  of  schedule-rating  and  unrating.  Anything 
approaching  order,  system,  or  any  of  their  synonyms 
in  this  turmoil  of  creation  and  destruction  is  out  of 
the  question;  even  in  the  last  resort  of  a  percentage 
change,  in  the  absence  of  any  generally  accepted  defini- 
tion of  classes,  it  is  impossible  to  describe  what  groups 
are  to  be  changed  without  a  long  sequence  of  explana- 
tory circulars,  and  circulars  explanatory  of  these 
explanatory  circulars.  Again,  it  is  as  difficult  and 
expensive  to  lower  tariff  rates  as  to  raise  them. 

It  is  useless  to  deny  that  the  absence  of  any  pro- 
vision for  the  prompt,  intelligent,  and  inexpensive 
change  of  rates  in  fire  insurance  creates  the  most  per- 
plexing  and  annoying  of  the  many  difficulties  which 
confront  American  underwriters.  If  you  ask  what 
would  remedy  this  defect,  I  must  preface  my  reply 
with  the  admission  that  many  people  by  courtesy  styled 


370  LECTURES  ON  COMMERCE 

fire  underwriters  do  not  regard  it  as  a  defect,  for  it 
constitutes  their  stock  in  trade — the  one  thing  which 
enables  them  to  do  business. 

On  the  other  hand,  fire-rating  is  a  sharply  differ- 
entiated function — as  distinct  from  the  numerous  other 
functions  of  the  industry,  let  us  say,  as  the  duties  of 
a  railway  auditor  are  distinct  from  those  of  a  master 
mechanic  or  engineer.  People  who  have  a  compre- 
hensive knowledge  of  the  rating  problem  are  as  rare 
among  fire  underwriters  as  expert  actuaries  among 
life  underwriters.  Ask  one  hundred  fire  underwriters 
for  an  opinion  on  the  subject:  ninety-five  would 
probably  be  found  to  have  no  definite  opinion,  and  the 
other  five,   views  which  dififer  each   from  the  other. 

Every  leading  company  maintains  for  its  own 
information  a  private  classification  of  property  groups, 
and  a  ledger  account  with  each  of  these  groups  or 
classes,  in  which  it  is  charged  with  its  losses  and 
share  of  expenses,  and  credited  with  its  premiums. 
In  this  way  every  company  is  able  to  segregate  its 
actual  experience  with  each  property  class,  and  this 
constitutes  a  basis  of  information  for  the  company  in 
the  selection  of  its  individual  business. 

The  theory  most  agitated  at  present,  perhaps,  is 
that  these  classification  lists  should  be  made  uniform, 
and  the  combined  experience  of  all  companies  com- 
piled as  a  basis  of  statistical  information  in  establish- 
ing rates  for  each  class.  The  fact  remains,  however, 
that  the  results  of  such  classification  would  be  of  no 
value  whatever.  The  theory  makes  no  provision  for 
rate  changes,  and  would  leave  untouched  all  the 
intolerable  evils  of  the  present  inflexible  tariff  system. 


FIRE  INSURANCE  371 

Aerain,  the  information  derived  from  these  combined 
statistics  predicated  upon  constantly  changing  rela- 
tions in  tariffs  would  fail  to  supply  any  definite  land- 
marks in  determining  what  rate  changes  ought  to  be 
made.  The  entire  plan  seems  to  approach  the  problem 
at  the  wrong  end  and  gives  no  promise  whatever  of 
ultimate  benefits.  It  is  an  attempt  to  construct  a  house 
without  a  square,  plumb-line,  two-foot  rule,  or  other 
instruments   for  measuring  direction   or  distance. 

The  real  source  of  this  variance  of  opinion  seems 
to  lie  largely  in  a  misunderstanding  as  to  the  immedi- 
ate end  sought.  While  there  is  room  to  believe  that 
ultimatelv  the  measurement  of  fire  hazard  will  take 
its  place  among  the  most  advanced  of  classificatory 
sciences,  this  must  come  by  evolution.  The  movement 
cannot  be  forced  or  hurried.  The  goal  of  science 
must  be  approached  by  progressive  stages,  through 
the  adoption  one  by  one  of  the  instrumentalities  neces- 
sary to  the  immediate  end  in  view.  The  first  essential 
is  some  instrumentality  for  making  rate  changes  with 
the  promptness  necessary  to  meet  the  exigencies 
created  by  fluctuations  in  annual  cost  without  a  whole- 
sale destruction  of  tariff  standards.  This  instrumen- 
tality is  not  only  an  immediate  and  practical  necessity, 
but  seems  to  be  a  condition  precedent  to  any  progress 
whatever  toward   more   scientific   methods. 

Fire  insurance  has  elaborated  a  system  of  static 
relations  in  its  tariffs.  It  now  needs  an  instrumen- 
tality which  will  enable  it  to  use  these  relations  as 
standards  for  measuring  the  kinetic  or  movable  rela- 
tions caused  by  constantly  changing  conditions.  In 
determining  what  this  instrumentality  shall  be.   it  is 


372  LECTURES  ON  COMMERCE 

proper   to   say   that   recent   events   have   conclusively 
demonstrated : 

1.  That  in  every  emergency  rate  changes  must  be 
made  by  percentages. 

2.  That  these  percentage  changes  have  invariably 
caused  injustice  and  dissatisfaction. 

3.  That  in  every  attempt  to  change  rates  in  this 
way  it  has  been  found  almost  impossible  to  describe 
property  groups  with  sufficient  definiteness  to  establish 
a  common  understanding. 

Percentage  changes  cause  injustice  simply  because 
the  principle  of  relativity  in  static  relations  has 
invariably  been  ignored.  These  changes,  when 
applied  to  logical  tariff  relations,  cannot  be  otherwise 
than  consistent  and  equitable,  but  when  applied  to 
tariffs  sown  thick  with  untrue  relations,  injustice 
results  simply  because  these  relations  are  untrue.  As 
experience  has  shown  that  in  every  emergency  rates 
imtst  be  raised  or  lowered  by  percentages,  it  follows 
that  shifting  and  untrue  relations  in  tariffs  must  give 
way  to  permanent  and  logical  relations.  When  two 
conflicting  conditions  confront  each  other,  that  which 
is  remediable  must  succumb  to  that  which  is  inevitable. 

Again,  if  we  seek  the  reason  why  nearly  every 
attempt  to  instruct  agents  concerning  rate  changes 
leads  to  confusion,  we  shall  find  that  this  difficulty 
arises  from  the  absence  of  a  clear,  concise,  and  gener- 
ally accepted  definition  of  property  groups — in  other 
words,  from  the  absence  of  an  agreed  classification 
in  tariffs  which  will  enable  anyone  to  refer  to  any 
class  by  its  designative  number  so  that  everybody  will 
understand  exactly  what  is  meant. 


FIRE  INSURANCE  373 

To  sum  it  up,  with  a  static  system  already  estab- 
lished, it  is  necessary  only  to  recognize  the  principle 
of  relativity,  and,  after  once  establishing  logical  rela- 
tions under  this  principle,  to  leave  them  severely  alone 
(save  as  actual  changes  occur  in  physical  hazard), 
and  thereafter  make  no  changes  except  by  percentages 
from  local  tariffs  in  which  each  risk  is  designated  by 
its  class  number.  These  things,  while  they  would 
constitute  an  instrumentality  for  establishing  the 
flexible  rates  which  have  become  a  sine  qua  non,  v^^ould, 
at  the  same  time,  constitute  a  progressive  step  in 
placing  the  tariff  system  in  line  with  all  other  methods 
of  scientific  measurement,  and  start  it  once  more 
toward  its  ultimate  goal  as  a  rigidly  scientific  solution 
of  the  most  complicated  system  of  taxation  in  the 
world. 

If  you  ask,  "What  are  the  prospects  of  this  reform?" 
I  can  only  cite  you  to  the  interesting  historical  mono- 
graph known  as  Charles  Lamb's  Dissertation  on  Roast 
Pig.  The  story,  as  I  remember,  is  substantially  as 
follows : 

In  the  early  days  in  China  it  was  the  fashion  to 
eat  meat  raw.  One  day  a  house  caught  fire  in  the 
absence  of  the  ow^ner,  and  roasted  a  litter  of  pigs.  On 
his  return,  in  the  attempt  to  drag  one  of  the  bodies 
out  of  the  ash  heap,  he  burned  his  fingers,  and  instinc- 
tively thrust  them  into  his  mouth  to  relieve  his  pain. 
The  event  was  historical,  for  it  was  the  first  time 
John  Chinaman  ever  tasted  roast  pig.  The  conse- 
quences were  momentous,  for  it  is  hardly  necessary  to 
say  that  he  found  it  good.  After  devouring  the  entire 
litter,  the  happy  discoverer  at  once  proceeded  to  build 


374  LECTURES  ON  COMMERCE 

another  house  and  roast  more  pig,  and  he  repeated  the 
process  until  his  numerous  adjustments  with  the  fire- 
insurance  companies  began  to  create  suspicion.  He 
was  shadowed  and  his  secret  discovered.  It  was  not 
long  before  all  China  was  eating  roast  pig.  The  fire- 
insurance  companies  were  thrown  into  bankruptcy  by 
the  dwellings  burned  in  the  cooking  process.  It  was 
many  generations  before  a  brilliant  genius  discovered 
the  great  economic  fact  that  a  pig  could  be  cooked 
without  burning  a  house,  but  when  he  began  to  preach 
this  doctrine  from  the  housetops,  he  was  looked  upon 
askance  as  a  dangerous  innovator,  and,  after  being 
repeatedly  bastinadoed,  he  was  finally  shut  up  in  a 
house,  and,  wnth  a  fine  sense  of  humor,  cooked  in 
the  prevailing  style. 

Schedule-rating  has  advanced  to  a  point  where  it 
is  possible  to  make  a  rate,  but  it  has  not  yet  become 
possible  to  change  it  without  destroying  an  edifice. 
As  it  took  many  generations  for  the  Chinaman  to  dis- 
cover the  great  economic  truth  that  pigs  may  be 
roasted  in  a  fireplace  or  cook  stove  without  burning  a 
house,  it  is  perhaps  not  unreasonably  optimistic  to 
hope  that  at  some  time  in  the  distant  future  it  may 
be  revealed,  as  by  an  inspiration,  that  a  rate  may  be 
"done  to  a  turn"  through  a  simple  instrumentality, 
which,  like  the  fireplace  and  cook  stove,  will  do  the 
work  and  spare  the  rating  edifice. 

I  have  dwelt  possibly  too  long  upon  the  pros  and 
cons  of  the  rating  problem,  wnth  the  desire  to  give 
you  an  idea  of  the  range  and  complications  of  at  least 
one  of  the  many  controversies  which,  like  the  great 
political  issues  of  American  politics,  are  always  raging 


FIRE  INSURANCE 


375 


among  fire  underwriters — controversies  which  are 
always  stirring  up  a  tempest  in  the  teapot  of  fire- 
insurancedom. 

I  have  frankly  admitted  the  defects  in  the  present 
tariff  system,  in  the  hope  that  you  will  believe  me 
equally  truthful  in  describing  the  many  things  which 
redound  to  the  credit  of  American  fire  underwriters. 

Time  will  not  permit  me  to  explain  the  numerous 
and  interesting  problems  found  in  the  expense  item 
of  fire  insurance  which  constitutes  about  40  per  cent, 
of  the  entire  disbursements  of  the  companies.  It  is 
proper  to  say,  however,  that  independent  companies, 
which  acknowledge  no  restraint  outside  of  their  owm 
will,  exercise  a  constant  and  irresistible  influence  in 
increasing  the  average  expenses  of  the  industry  through 
high  commissions,  and  that  this  increase  falls  directly 
upon  the  policy  holder;  yet  many  states  have  gone  so 
far  as  to  forbid  any  associated  effort  even  in  reducing 
expenses,  all  of  which  goes  to  show^  that  the  old  man 
was  right  when  he  said :  "My  son,  go  forth  and  learn 
W'ith  how  little  wisdom  the  world  is  governed." 

It  may  be  said  without  qualification  that  the 
minimizing  of  fire  waste  and  the  reduction  of  expenses 
are,  and  always  have  been,  the  dominant  motives — 
in  fact,  the  very  raison  d'etre — of  fire-insurance  asso- 
ciations. These  associations  have  been  the  kinder- 
garten, common  school,  academy,  and  university  of 
fire  insurance.  They  have  embodied  the  educational 
curriculum  of  fire  underw^riters,  and  their  educative 
influence  has  radiated  far  and  wide  upon  the  great 
public.  They  have  taught  communities  how^  to  organ- 
ize fire  departments,  how  to  formulate  municipal  laws 


376  LECTURES  ON  COMMERCE 

for  the  repression  of  fire  waste,  how  to  handle  inflam- 
mables with  the  minimum  of  danger,  how  to  construct 
safe  buildings,  how  to  use  electricity  intelligently;  and 
last,  but  not  least,  in  doing  these  things  they  have 
shown  policy  holders  how  to  secure  an  immediate 
and  commensurate  reduction  in  their  rates;  for  this 
reduction  is  offered  by  every  tariff;  indeed,  it  might 
truthfully  be  claimed  that  the  fire-insurance  tariff  in 
its  direct  results — pecuniarily,  at  least — is  the  most 
profitable  text-book  ever  offered  to  the  American 
public.  All  these  things,  which  are  certainly  pro  bono 
publico,  are  the  aim  and  end  of  fire-insurance  associa- 
tions, and  there  is  no  possible  way  to  secure  these 
things  except  through  associated  effort  on  the  part  of 
people  who  make  the  study  of  the  fire  hazard  their 
life-work. 

I  have  tried  to  put  a  girdle  around  the  world  of 
fire  insurance  in  forty  minutes,  and  though  I  have 
doubtless  taxed  your  patience,  I  fear  I  have  given  you 
but  a  vague  conception  of  its  complex  phenomena.  I 
trust,  however,  that  I  have  succeeded  in  showing  you 
that  it  is  a  little  world  in  itself,  teeming  with  life, 
tossed  hither  and  yon  by  contending  opinions;  a 
world  in  the  throes  of  an  evolution  dominated  by 
environment;  a  world  where  law  is  slowly  struggling 
out  of  chaos  into  order;  a  world  in  which  the  cen- 
tripetal spirit  of  the  hive  is  struggling  with  the  cen- 
trifugal spirit  of  the  ego;  a  world  of  problems  and 
mistakes;  and  last,  but  not  least,  a  world  whose 
government  is  neither  autocratic  nor  oligarchic,  but 
communal.  There  can  be  no  correct  understanding 
of  fire  insurance  without  a  full  recognition  of  the  fact 


FIRE  INSURANCE 


377 


that  its  phenomena  emanate  from  a  community  in 
which  every  individual  has  a  voice  and  an  influence. 

Fire  insurance  as  an  activity  occupies  the  unique 
position  of  being  an  undefined  industry.  The  conven- 
tion that  framed  our  national  constitution  left  it  out 
in  the  cold  as  a  thing  unworthy  of  notice.  Courts, 
legislative  bodies,  and  executives  seem  to  have  no 
definite  idea  of  its  relational  nature  as  compared  with 
other  industries.  Everybody  seems  content  to  know 
what  it  is  not.  The  courts  have  decided  that  it  is  not 
commerce.  Uncle  Sam,  who  seems  disposed  to  father 
everything  else,  regardless  of  sex,  color,  or  previous 
condition,  has  disowned  it.  It  is  unpanoplied  by  Colum- 
bia's shield.  The  American  eagle  does  not  spread  his 
wings  over  it,  and  knows  it  not,  except  to  give  it  a  peck 
now  and  then  when  he  wants  it  to  disgorge  revenue. 
The  glorious  stars  and  stripes  have  never  been  riddled 
in  its  defense ;  and  when  the  fire-eating  Fourth  of  July 
comes  around  with  his  "rockets,  red  glare,  and  bombs 
bursting  in  the  air,"  it  quakes  in  mortal  terror,  for  it 
knows  from  sad  experience  that  these  things,  though 
fun  for  the  boys,  are  death  to  underwriting  profit. 

Finally,  fire  insurance  seems  to  offer  at  every  turn 
a  curious  and  stubborn  reversal  of  cause  and  effect. 
A  celebrated  mathematician  once  wrote  a  nonsense 
book  for  children  which  purported  to  give  the  adven- 
tures of  a  little  girl  in  a  looking-glass  world  where 
everything  was  seen  inverted  by  reflection.  Fire 
insurance  presents  an  interesting  analogy  to  this 
looking-glass  land,  for  not  infrequently  we  find  that 
what  we  supposed  to  be  north  is  south;  east  often 
turns  out  to  be  west;    and  when  we  put  forth  our 


378  LECTURES  ON  COMMERCE 

right  hand,  we  are  as  liable  as  not  to  prod  it  on  the 
wrong  side.  This  curious  reversal  of  relations  often 
leads 'to  absurd  Jion  seqiiitiirs  when  legislative  wisdom 
attempts  to  regulate  it;  and  by  legislative  wisdom  I 
mean  the  wisdom  inside  as  well  as  outside  of  the  indus- 
try, for  fire  underwriters  themselves  are  most  earnest 
and  persistent  Solons;  indeed,  I  hardly  know  one  who 
does  not  carry  about  his  person  some  legislative  pana- 
cea warranted  to  set  everything  to  rights. 

The  French  Academy,  when  engaged  in  construct- 
ing a  dictionary,  agreed  upon  the  following  definition 
of  the  word  **crab" :  "a  small  red  animal  that  walks 
backward."  When  this  definition  was  submitted  to 
an  eminent  naturalist  for  criticism,  he  said  it  was  all 
right  with  three  exceptions :  first,  a  crab  is  not  an 
animal ;  second,  it  is  not  red ;  third,  it  does  not  walk 
backward.  Perhaps  we  need  a  naturalist  to  tell  us 
what  fire  insurance  really  is.  It  has  been  ingeniously 
suggested  that  it  represents  the  feminine  principle  in 
the  business  world,  and  it  is  claimed  with  some  show 
of  reason  that  this  theory  is  supported  by  its  topsy- 
turvy logic  in  which  conclusion  leads  to  premise  rather 
than  premise  to  conclusion. 

You  will  soon  be  going  forth  into  this  world  "of 
sixes  and  sevens"  to  take  your  part  in  making 
humanity  behave  itself.  I  feel  confident  you  have 
aspirations  in  this  direction — we  all  have. 

You  may  become  jurors,  judges,  or,  if  you  are 
especially  virtuous,  even  members  of  the  city  council 
or  state  legislature.  I  trust  these  and  even  greater 
honors  may  be  in  store  for  you,  but  I  venture  to  warn 
you  to  consider  well  before  you  attempt  to  regulate 


FIRE  INSURANCE  379 

anything  so  essentially  feminine  as  "the  handmaiden 
of  commerce" — fire  insurance. 

You  may  develop  abnormal  abilities  as  leaders  of 
men.  You  may  be  able  to  control  your  children, 
manage  your  servants,  drive  your  horses,  make  your 
hens  lay  where  they  prefer  to  set.  You  may  be  able 
to  control  your  facial  muscles  so  as  to  look  ingenuous 
when  disingenuous,  or  wise  when  otherwise;  but  in 
closing,  as  a  veteran  who  has  had  a  long  experience 
with  both,  I  adjure  you,  as  you  value  domestic  har- 
mony, go  slow  in  asserting  your  authority  with  your 
wiie  or  fire  insurance.  Right  or  wrong,  the  helpmeet 
of  man  and  the  handmaiden  of  commerce  will  work 
out  their  own  destiny,  and  any  wrong  inflicted  on 
either  will,  like  chickens,  come  home  to  roost.  Both 
embody  the  eternal  mystery  of  femininity,  and  when 
you  think  you  know  them  best  you  know  them  the 
least. 

Amiel's  definition  of  one  will  answer  perfectly  for 
both: 

She  never  speaks  out  her  whole  thought.  What  she  knows  of 
it  is  but  a  part  of  what  it  really  is.  Complete  frankness  is  impos- 
sible to  her,  and  complete  self-knowledge  seems  to  be  forbidden  to 
her.  She  has  no  need  of  perfidy,  for  she  is  mystery  itself.  She 
is    something    fugitive,    irrational,    indeterminate,    illogical,    and 

contradictory Capable   of   all    kinds    of    devotion    and    all 

kinds  of  treason,  a  sphinx  incomprehensible  raised  to  the  nth. 
power,  she  is  at  once  the  mistress  and  the  servant,  the  aggrava- 
tion and  the  consolation,  of  man. 


INDEX 


INDEX 


Act  to  Regulate  Commerce, 
103,  119-23. 

Advertising:  agency  for,  197; 
business,  195  ;  daily  papers, 
194;  demand,  187;  educa- 
tional value,  189 ;  effect  on 
consumer,  186  ;  expense  saved 
by,  188 ;  finished  products, 
180  ;  "follow  up"  system,  199  ; 
importance,         177;  invest- 

ments, 191,  192  ;  magazines, 
193;  media,  190;  proprietary 
remedies,  191,  192;  raw  ma- 
terials, 178;  signboards  and 
billboards,  194 ;  street  cars, 
194  ;    weekly  papers,   191,   193. 

Agriculture,  relation  to  rail- 
ways, 86. 

Allen,   Horatio,  64,   65. 

Anti-Trust  Act,   123. 

Armor,    forging   of,    158. 

Atchison,  Topeka  &  Santa  Fe 
Railway,    105. 

Bangs,  George  S.,  75. 
Bank   notes,  bond   security   for, 
238. 

Banks,  national  :  capital  of, 
239  ;  circulation  of,  235,  238  ; 
Credit  Department  in,  244, 
deposits,  255  ;  establishment 
of,  234  ;  examiners,  236  ;  fail- 
ures, 241  ;  large  banks,  251  ; 
purchase  of  commercial  paper 
by,  245  ;  real-estate  loans  by, 
242,  249  ;    safety  of,  243. 

Bessemer,  Sir  Henry,  134,  166. 
Bessemer    process,    134,    basic, 

135- 
Bethlehem  Iron   Co.,   172. 

Bonds  :  corporation  267-71  ; 
government,    261  ;     municipal. 


2(^2 ;  public  utility,  269  ;  rail- 
road, 267  ;  security  for  bank 
notes,  238;  state,  261;  water- 
works, 270. 

Business  class,  and  the  uni- 
versities,  13,   16. 

Catalan  forge,  151,  161. 

Checks  :  cashing  of,  319 ; 
crossed,  319. 

Chicago,   growth   of,    142. 
Civil-service   rules,   in   railway 

service,   50. 
Claim  Agent,   Chief,   j,6. 

Commerce,  175  ;  Act  to  regulate, 
119-23;  importance  of  steel  to, 
139- 

Commercial  bills,  classes  of, 
313- 

C0MMERCI.\L     high     SCHOOLS,     2T,. 

Commerci.\l      education:       see 

Education. 
Commercial   paper,   245. 

Comptroller  of  the  Currency: 
appointment  of,  233  ;  crea- 
tion of  office  of,  2ZZ  ;  Depart- 
ment of  Reports,  237  ;  Issuing 
Department,  237  ;  Organiza- 
tion Department,  234  ;  power 
in  panics,  240 ;  Redemption 
Department,  22,^  ;  Treasury 
Department,  relation  to,  234, 
236. 

Consolidation,    railway,    11 1-28. 

Conversion  tables,  297. 

CooLEY,   T.   M.    121. 

Corporation   bonds,  267-71. 

Cort,  Henry,  163. 

Credit  :  ability  necessary  for, 
222 ;  basis  of,  220 ;  capital 
necessary  for,   225  ;    definition 


383 


384 


LECTURES  ON  COMMERCE 


of,  257  ;  expansion  of,  257  ; 
fire  insurance,  based  on,  330  ; 
honesty  necessary  for,  221  ; 
importance  of,  218,  257  ;  in- 
dustry, necessary  for,  222 ; 
transactions  on,  220. 
Credit  Department  :  of  whole- 
sale business,  211  ;  in  national 
banks,   244. 

Davis,  William  A.,  7^- 
Discipline,   railway  service,   52. 
Discount  rates,  292. 
Distributing    post-offices,    68, 

69. 
Districts,   railway,  41. 
Divisions  of  railways,  37. 

Education  :  advantageous  to 
business  men,  214;  bankers, 
1 1  ;  defects  of  present  system 
of,  9 ;  elective  system  in,  3 ; 
journalism,  21  ,  railway  man- 
agers, 10;  traditional  college, 
3  ;  university,  mainly  for 
training  teachers,   7. 

Education,  commercial  :  advan- 
tages of,  6  ;  cultural  value  of, 
8,  15  ;  curricula,  17-20,  215  ; 
disciplinary,  not  technical,  20, 
22  ;  German,  24  ;  international 
trade  and,  24 ;  high  schools, 
2^  ;  object  of,  24  ;  objections 
to,  s;  practicability  of,  14; 
universities,   17-20. 

Elective  system,  introduction 
of,  3. 

Engineer:  chief,  32;  bridges 
and  buildings,  32  ;  mainten- 
ance of  way,  T,Z  ;  mechanical, 
34 ;     signal,    Z2- 

Ericson,   John,    165. 

Exchange  (foreign)  :  actual 
rates,  302  ;  "  after  clearings," 
302  ;  amount  of,  280  ;  arbitra- 
tion of,  290  ;  basis  of,  303  ; 
"  before  clearings,"  302.  Bills 
of  exchange:  Antwerp,  313; 
"clean,"  314  ;  commercial,  313  ; 
condition     for     buying,     309 ; 


dealings  in,  308 ;  Hamburg, 
301  ;  Holland,  301  ;  how  val- 
ued, 307  ;  how  created,  305  ; 
London  bankers,  300  ;  London 
documentary,  301  ;  when  drawn, 
318.  Buying  rates,  300;  cable 
transfers,  290 ;  cashing  of 
checks,  319  ;  "  crossed  checks," 
319  ;  definition  of,  279  ;  direct, 
290 ;  discounts,  301  ;  docu- 
mentary rates,  302  ;  fluctuation 
in  rates  of,  291  ;  gold-export- 
ing and  gold-importing  points, 
^93  ;  hypothecation  certificate, 
310;  par  of  exchange,  293; 
private  discount  rate,  312; 
posted  rates,  302.  Quotations  : 
296 ;  explained,  299 ;  for 
English,  298  ;  for  French,  297  ; 
for  German,  298.  Rate  of, 
fixed  by  Bank  of  England, 
311  ;  rebate  rate,  312;  selling 
rates,  299.  See  also  Money 
OF  account. 

Factories,  relation  to  railways, 
87. 

Fire  Departments,  organization 
of,    348. 

Fire  insurance  :  adjusting,  339, 
342  ;  agents  of,  338  ;  associa- 
tions of  companies,  350  ;  basis 
schedule,  362 ;  beginnings  of, 
Z27,  328 ;  blanketing,  354 ; 
capital  in,  331  ;  changes  in 
rates  of,  371  ;  Chicago  inspec- 
tion bureau,  347  ;  commissions 
of  agents,  336 ;  credit  neces- 
sary in,  330 ;  definition  of, 
^22 ;  expense  of,  375  ;  ex- 
posure hazard,  365  ;  function 
of,  324 ;  gambling,  different 
from,  227 ;  income  of,  334 ; 
inspector,  346 ;  organization 
of,  232  ;  outgo  of,  334  ;  over- 
insurance,  356  ;  policy,  339  ; 
standard,  340 ;  prohibited  list, 
336  ;  rating,  358,  362,  367,  37i  ; 
risk  of,  335  ;  schedule  system 
of  rates,  362,  367  ;  statistics 
of,  326  ;  taxation,  357  ;  "Three- 
fourths    Value    Clause,"    356; 


INDEX 


385 


Western      Salvage      Wrecking 
Co.,  349. 
Foreign     exchange  :      see     Ex- 
change. 

Forging  :  America,  168  ff. ;  Ar- 
mor, 158;  Bethlehem  Iron 
Co.,  171;  early,  154;  effect 
of  gunpowder  on,  160  ;  India, 
155  ;  Middle  Ages,  155  ;  open- 
hearth  steel,  171  ;  shafts,  170; 
Sterling  Iron  Works,  168  ; 
swords,  157  ;  Wawayanda, 
168. 

Freight  rates,   103. 

Freight  traffic,  42. 

Gold  :  coinage  charges,  284 ; 
exporting  point,  293  ;  ship- 
ments of,  283  ;  value  of,  282. 

Government  ownership  of 
railways,  105,  107. 

Granger  movement,  103. 

High    schools,    commercial,    23. 
Huntsman,    Daniel,    162. 
Hypothecation  certificate,  310. 

Industrial   development,    82. 

Industries,  establishment  of 
new,    92. 

Interstate  Commerce  Act,  103, 
119. 

Interstate  Commerce  Commis- 
sion, 109,  119,  122. 

Investments  :  building  and  loan 
associations,  266  ;  corporation 
bonds,  267  :  desirability  of, 
260 ;  funds  for,  254,  259 ; 
industrials,  zjj,  ;  mortgages, 
249,  264  :  public  securities,  261  ; 
rate  of  interest,  276  ;  real  es- 
tate, 263  ;  stocks,  271.  See  also 
Bonds,  Stocks. 

Iron  :  Central  and  South  Am- 
erica, 150  ;  Chaldea,  149 ; 
China,  148  ;  early  use  of,  147  ; 
effect  of  different  elements  on, 
132;  England,  156;  Egypt, 
148,    151;     India,    149;     Phoe- 


nicia, 148.  Manufacture  of  iron  : 

by    Catalan    forge,     151,  161  ; 

earliest,    151  ;    in    Egypt,  151  ; 

hot   blast    in,    138;     pig,  131; 
by   puddling  process,    163  ;    by 

regenerative        furnace,  139. 

Wrought,   132.     See  also  For- 
ging,   Steel. 

Iron  workers,  guilds  of,   159. 
Issuing     Department      (Comp- 
troller of  Currency),  2n. 

Journalism,    education    for,    21. 

Krupp,  Friedrich,  165,  167. 

Lake  Shore  &  Michigan  South- 
ern   Railroad,    76. 

Locomotives  :  adoption  of,  by 
South  Carolina  Railroad,  64 ; 
speed  of  early,  58 ;  speed  of 
present,    59 

Lowell,  J.   R.,   4. 

Mail  service  :  city  distribution, 
79  ;  distributing  post-offices, 
68 ;  early,  57 ;  exclusive 
trains,  75  ;  express,  61  ; 
Hannibal  &  St.  Joseph  Rail- 
road, Tz  ;  in  1850,  65  ;  mail 
cars,  67  ;  overland,  tz  ',  post- 
offices  introduced,  66  ;  pouch- 
ing, 67  ;  railways,  first  used, 
60. 

Mail  tr.\ins,   75,   78. 
Manufacturing,  beginning  of  in 
United    States,    82. 

Martin,  Pierre  and  Emile,  167. 
Master    Mechanic  :      assistants 
to,   40 ;    duties    of,   40. 

Merchant,  wholesale  :  buyer, 
207  ;  financier,  207  ;  judge  of 
credits,  209  ;    salesman,  209. 

MiDVALE  Steel  Co.,   171. 

Money:  gold,  282;  paper,  281; 
silver,    281. 

Money  of  account  :  Africa, 
286  ;  Canada,  284 ;  Central 
America,  285  ;  China,  287  ; 
Germany,  288  ;    Great  Britain, 


386 


LECTURES  ON  COMMERCE 


289 ;  Holland,  289 ;  Hong 
Kong,  287  ;  India,  287  ;  Japan, 
286 ;  Latin  union  countries, 
288  ;  Mexico,  285  ;  Oceanica, 
286  ;  Portugal,  289  ;  Russia, 
289 ;  South  America,  285  ; 
Scandinavian  countries,  289. 
Movements   of   trains,   45. 

MiJNSTERBERG,    HuGO,    1 4. 

MusHET,   Robert,    i66. 

Nasmyth,  James,    164. 
National   banks  :      See   Banks. 
Neilson,  James  Beaumont,  163. 
New  York   Central  &   Hudson 
River  Railroad,  76. 

Open-hearth  process,  167,  171. 

Par  of  exchange:  definition  of, 
293 ;     how   determined,    294. 

Pennsylvania   Railroad,   tj. 

Pension  Department,  adminis- 
tration of,   55. 

Pensions,  in  railway  service,  53. 

Police,   Chief   of,   36. 

Policy  :      fire     insurance,     339 ; 

standard,    340. 
Pooling,    railway:     advantages 

of,    120;     legalization   of,    104, 

105,   106;    prohibition  of,   104, 

123. 

Post-offices  :  distributing,  67  ; 
railway,   66,   71,    11,    79- 

Railways  :  advantages  of  pool- 
ing of,  120;  advertising,  90, 
97,  100 ;  Atchison,  Topeka 
&  Santa  Fe,  105  ;  Baltimore  & 
Ohio,  60;  charters,  114;  Chief 
Claim  Agent,  36  ;  Chief  En- 
gineer, 32  ;  Chief  Surgeon,  36  ; 
Civil-service  rules,  50 ;  com- 
petition, 104,  113;  consolida- 
tion of,  105,  III,  128;  Cooley 
on  competition  between,  121  ; 
decrease  in  rates  on,  107  ;  def- 
initions, 44  ;  density  of  traffic, 
124;  departments,  30;  dis- 
cipline, 52  ;  districts  of,  41  ; 
divisions  of,  27  !  Division  Su- 
perintendent,   38 ;      early,    58, 


81  ;  Engineer,  Chief,  31  ;  As- 
sistants to,  32  ;  exclusive  mail 
trains  on,  76 ;  expansion  of, 
84  ;  factories  and,  87,  90  ff. ; 
freight  rates,  103,  107,  124; 
freight  traffic,  42 ;  General 
Manager,  27  ',  General  Su- 
perintendent, 34  ;  government 
ownership  of,  105,  107  ;  Gran- 
ger movment,  103  ;  hotels  es- 
tablished by  Industrial  De- 
partment, 100 ;  Immigration 
Agent,  85  ;  importance  of, 
102 ;  industrial  development 
and,  82 ;  Industrial  Depart- 
ment, 88 ;  Interstate  Com- 
merce Act,  103,  119-23;  Lake 
Shore  &  Michigan  Southern, 
y6  ;  Law  Department,  30  ;  Ma- 
chinery Department,  33  ;  mail- 
service  on,  57  ff. ;  Master 
Mechanic,  40 ;  movement  of 
trains,  45  ;  New  York  Central 
&  Hudson  River,  76  ;  Operat- 
ing Department,  30  ;  owner- 
ship of,  29  ;  pensions,  53-55  ; 
Pennsylvania,  77;  pooling,  104, 
105,  106,  120,  123;  prohibition 
of  pooling  of,  123  ;  promotion 
of  employees  of,  51  ;  purpose 
of,  29  ;  Reagan  Bill,  103  ;  regu- 
lar trains,  46 ;  regulation  of 
construction,  109;  regulation 
of  rates  on,  103,  109,  117;  re- 
lation to  agriculture,  86  ; 
Road  Department,  31  ;  Road 
Master,  39 ;  speed  on,  59 ; 
Stage  competition  with,  62 ; 
"  Standard  Code,"  44,  49 ; 
Station  Agent,  42 ;  station 
service,  42 ;  Superintendent, 
General,  34 ;  Assistants  to, 
36 ;  Superintendent  of  Ma- 
chinery, 33  ;  Superintendent  of 
Telegraph,  36  ;  Superintendent 
of  Transportation,  36  ;  Traffic 
Department,  30 ;  Train  Dis- 
patcher, 48  ;  Train  Master,  40  ; 
train  orders,  49  ;  Transporta- 
tion Department,  34 ;  Treas- 
ury Department,  30 ;  work  in 
securing  new  settlers,  85  ; 
Yard  Master,  41. 


INDEX 


387 


Railway  post-office  :  Hannibal 
&  St.  Joseph  Railroad,  73  ; 
influence  of  W.  A.  Davis  on, 
73  ;  introduction  of,  66 ;  ne- 
cessity for,  71  ;    work  in,  79. 

Rate  of  exchange  :  definition 
of,  290  ;  discount,  292  ;  fixed 
by  Bank  of  England,  311; 
fluctuations  in,  291  ;  private 
discount,    312;     rebate,    312. 

Reagan  Bill,  103. 

Real-estate     securities,      263  ; 

building  and  loan  associations, 

266  ;    mortgages,  264. 
Regenerative    furnace,    167. 
Road  Master,  assistants  to,  40  ; 

duties  of  39. 
Rogers,   Samuel  Baldwyn,   163. 

Schneider  &  Co.,  165,  173. 

Securities,  public,  261.  See 
also    Bonds,    Stocks. 

Shuckburgh  -  Evelyn,  Sir 
George,  3. 

Siemens,  C.  N.,  167. 

Siemens-Martin  process,  167, 
171. 

Solomon,   Legend   of,    145. 

Stages,  competition  of,  with  rail- 
ways,  60,   63. 

Standard  Code,  44,  49. 

Station  Agent,  assistants  to,  42. 

Station  service,  42. 

Steam-hammer,  invention  of, 
164. 

Steel:  blister,  161,  162;  con- 
verted, 152;  crucible,  137, 
162;  ingots,  165;  manufac- 
ture, 132  ;  Bessemer  process, 
134;  cementation  process,  152; 
early,  152  ;  in  Arabia.  153  ; 
in  Britain,  154;  in  Greece, 
153  :  in  India,  153  ;  in  Rome, 
154;  in  Spain,  154;  old  pro- 
cess, 133  ;  open-hearth  pro- 
cess, 135,  167,  171  ;  regenera- 
tive process,  167  ;  trompe  in, 
161  ;  open  hearth,  135,  137, 
171  ;  rails,  140  ;  shear,  161  ; 
yses  of,   137;    -u'oots,   153. 


Stocks,  271  ;  industrial,  273 ; 
railway,    272. 

Superintendent,  Division  :  du- 
ties  of,   38 ;    assistants   to,   38. 

Superintendent,  General  :  du- 
ties of,  34 ;    assistants  to,   36. 

Superintendent  of  Machinery  : 
duties  of,  33  ;  assistants  to, 
34- 

Superintendent  of  Telegraph, 
36. 

Superintendent  of  Transporta- 
tion,   36. 

Surgeon,  Chief,  36. 

Swords,   forging  of,   157. 

Train    Dispatcher,   48. 

Tit<\iN  Master:  assistants  to, 
41  ;    duties  of,  40. 

Train  Orders  :  classes  of,  49 ; 
standard  forms  of,  48  ;  trans- 
mission of,  49  ;  "  19,"  49,  50  ; 
"  31,"  49,   SO. 

Train  Rules,  Standard  Code  of, 
44. 

Transportation,  advantages  of 
good,  141. 

Trompe,    161. 

Trusts,    regulation    of,    273. 

University  :  business  men  not 
attracted  to,  13  ;  Chicago,  19  ; 
Harvard,  17;  Leipsic,  17; 
Pennsylvania,  18  ;  Wisconsin, 
17- 

Vanderbilt,  Commodore,  76. 

Watt,  James,  164. 
Western      Salvage      Wrecking 
Co.,  349. 

Whitworth,  Sir  Joseph,  167, 
172. 

Wholesale  business  :  bases  of, 
204  ;  Credit  Department  of, 
211  ;  daily  routine  of,  211  ; 
opportunities  in,  205  :  Order 
Department  of,  212;  Shipping 
Department    of,    213. 

YapvD  Master,  41,  43. 


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